THAD J. COLLINS, CHIEF BANKRUPTCY JUDGE.
This matter came on for trial on April 21, 2017 in Cedar Rapids. Chad Swanson and Dan Childers appeared for Lynn Kingery as executor of the Bernice Gill estate ("Ms. Kingery"). Tom Lawlor appeared for Lincoln Savings Bank as executor of the Irene Vorhes estate ("LSB"). Ron Martin, Joe Day, and Aaron Blair appeared for Jean Westendorf as Trustee of S & V Trust ("S & V Trust"). Eric Lam appeared for Chapter 7 Trustee David Sergeant. Pat Vickers appeared for Vorhes Ltd. The Court heard testimony and evidence. The parties filed briefs. Although their counsel appeared at trial, neither the Chapter 7 Trustee nor Vorhes Ltd. offered evidence, made argument, or filed briefs.
After the briefs were filed, S & V Trust filed a motion to strike portions of LSB's brief. The Court held a hearing on that motion on May 25, 2017 and took it under advisement with the matters from trial. These are core proceedings under 28 U.S.C. § 157(b)(2).
This case is about the ownership of stock in Vorhes Ltd., a family farm company. In particular, the Court is called on to determine whether Bill Vorhes (Chapter 7 Debtor) owns any of the stock and, if so, how much. The parties disagree about who is a shareholder and, in turn, who owns and/or controls how many shares. In determining who is a shareholder, the parties disagree about whether two transactions, with respect to that stock, were effective. The first involves an alleged transfer of stock by Bill to a trust he purported to establish called S & V Trust. The second involves the alleged cancellation of some shares of stock by Vorhes Ltd.
The Court is also asked to resolve the issue of whether Vorhes stock that was specifically devised in the will of the family matriarch, Irene Vorhes, remains in Irene's estate, or whether it automatically transferred to her children, including Bill, by operation of a statutory deadline under Iowa law. For the following reasons, the Court concludes the Bill Vorhes bankruptcy estate owns shares he attempted to transfer to S & V Trust, and the Irene Vorhes' share of stock remained in her estate at the time relevant to the issues before this Court.
Vern and Irene Vorhes were married and had four children: Bill Vorhes; Pete Vorhes; Jean Vorhes Westendorf; and Bernice Vorhes Gill. Vern, Irene, and Bernice have all passed away and the estates of Irene (through LSB) and Bernice (through Lynn Kingery) are involved in this case.
In 1979, Vern and Irene created Vorhes Ltd. ("the company") as an Iowa corporation for their family farming operation. Vern and Irene owned 20,000 shares in the
When Vern died, his will provided that his 5,758 shares be split between his four children, subject to a life estate in favor of Irene. Irene died on December 11, 2010 and her life estate in Vern's 5,758 shares terminated. As a result, Vern's 5,758 shares were divided equally between Bill, Jean, Bernice, and Pete, under the terms of Vern's will. Thus, each of the four Vorhes children then owned 3,560.5 shares consisting of the 2,121 they received previously plus 1,439.5, their quarter share of Vern's 5,758.
Irene's will specifically devised the 5,758 shares she owned to be divided between Bill, Jean, and Bernice. Pete was not included because he had previously agreed with the company to surrender all of his shares back to the company — including his shares from Vern — in exchange for some company farmland. Pete now has no stock or interest in the company and is not a part of the company or this dispute.
In January 2011, Bernice and Jean were appointed co-executors of Irene's estate. In April 2011, Bill became President of Vorhes Ltd. Jean became Vice President and Treasurer.
On September 7, 2011, Bernice brought a shareholder derivative action on behalf of the company in Iowa District Court for Floyd County. Bernice argued that Bill owed the company hundreds of thousands of dollars on a number of personal loans he took and for use of the company's farmland that he did not pay for.
On March 11, 2013, while the shareholder derivative litigation was still pending, Bill created the S & V Trust. The S & V Trust "Declaration of Trust" itself has some threshold problems. For example, it references an oil and gas lease, as well as a $1 million loan from Jean. The S & V Trust, however, has no interest in oil or gas leases and Jean has not loaned money to S & V Trust. Bill set up the S & V Trust with the assistance of Marvin Pullman, a non-lawyer. Mr. Pullman has since been found to have been engaged in the unauthorized practice of law in Iowa and has been permanently enjoined from doing so anymore.
Bill made himself general manager of S & V Trust. He made Jean a Trustee of S & V Trust. Bill's grandchildren, Blake Vorhes and Elias Vorhes, are the only specified beneficiaries of S & V Trust. The S & V Trust is not court-supervised.
Bill testified that he transferred 2,121 of his shares of Vorhes Ltd. to S & V Trust when he created it. Bill testified that the 2,121 shares are S & V Trust's only asset. Bill does not claim he transferred 3560.6 of shares, which is the 2,121 shares plus the 1,439.5 shares from Vern Vorhes. Bill claims all Vern and Irene stock shares were cancelled by the company.
Bill did not give Vorhes Ltd. any written notice of his transfer of Vorhes Ltd. stock to S & V Trust. Bill also did not receive written consent from the other Vorhes Ltd. shareholders to make the transfer. Bill also claims that he also transferred a $700,000 or $800,000 debt that he owed to Jean to the S & V Trust. Bill testified that S & V Trust now owes Jean that money and he does not.
On March 20, 2013, there was a Vorhes Ltd. shareholder meeting. The minutes from that meeting show that Bill did not have actual possession of his shares that he allegedly transferred to S & V Trust. The minutes indicate Bill was going to contact Bernice to get the shares out of a
After his purported March 2013 transfer to S & V Trust, Bill continued to attend Vorhes Ltd. meetings as a shareholder and voted his shares. Bill and Jean claim Bill was attending under his authority as General Manager of S & V Trust, and voting the S & V Trust shares he had transferred. No documentation supports that assertion. The only relevant documents are the minutes from those meetings. The minutes never mention S & V Trust or show that Bill attended Vorhes Ltd. meetings as General Manager for S & V Trust. The minutes reference Bill only as himself and show he votes his shares. Bill asserts now that there was no reason to talk about the stock being in S & V Trust because "everyone knew" how he had set things up.
Vorhes Ltd. held another shareholder meeting on June 8, 2013. Jean claims that at that meeting all three of the shareholders agreed to "cancel" — or "retire"
The minutes from the June 8, 2013 meeting show that Bill, Jean, and Bernice all attended. The minutes, however, say nothing about an agreement to cancel or retire shares of stock. Jean claims that the secretary taking notes did not write it down but they all agreed. Jean admitted that there is no written document showing Bernice agreed to cancel or retire the shares.
At some point, Jean wrote "retired non-voting stock" across the front of Irene's and Vern's stock certificates. Jean was not secretary of the company when she wrote this. Adding to the confusion, the back of the shares say they were transferred to the company and that new shares were issued to the company. It is undisputed, however, that new shares were never issued to the company.
In July 2013, Vorhes Ltd. answered interrogatories in the derivative action Bernice brought against Bill and the company. Interrogatory 12 from Bernice asked for the names of all parties who owned stock in the company and Vorhes Ltd. answered that Bernice, Jean, and Bill were the stockholders. The answer does not mention S & V Trust. Bill testified that he told the company attorney at the time that S & V Trust owned the stock, not him. The answer to Interrogatory 1, however, states that Bill and Jean were the ones answering and giving assistance in answering the interrogatories. When confronted with this fact, Bill testified that he had never seen the document before.
On February 7, 2015, Jean and Bernice were removed as co-executors of Irene's estate. LSB was appointed executor of the estate. LSB remains executor of Irene Vorhes estate. Julie Versluis works for LSB and was assigned to manage the estate. She testified at trial of this matter currently before the Court. She testified that Irene's 5,758 shares (allegedly cancelled) are still in the possession of LSB for Irene's estate, along with a $300,000 note from the company and $1000 cash. Irene's estate still had possession of Irene's 5,758 shares because LSB had seen no documents showing that Bernice, who was a co-executor, agreed to transfer the shares out of the estate. Versluis further testified that LSB needed to retain Irene's 5,758 shares to fulfill its duties as executor to pay the estate's debts and costs of administration. She testified that she does not know how much the costs of administration ultimately will be because the administration is ongoing. Costs are based on the value of estate assets and the stock has not been valued.
On April 6, 2015, the Judge Foy issued a written ruling on Bernice's shareholder derivative suit. He entered judgment against Bill for unpaid loans from Vorhes Ltd. and rent totaling $462,581.70, along with attorney's fees. Judge Foy gave Bill the option of either paying the judgment by July 31, 2015, or returning Vorhes Ltd. shares equal to the value of the judgment to the company as payment. Judge Foy also prohibited Bill from voting any shares or serving as an officer of Vorhes Ltd.
Vorhes Ltd. held a shareholder meeting on April 6, 2015. Bill appeared at that meeting and, contrary to Judge Foy's order, voted shares. Bill did not appear as General Manager for S & V Trust nor did he purport to be voting S & V Trust's shares. Ms. Versluis attended that meeting as executor for Irene's estate. Bill and Jean were present, but Bernice was not. The minutes do not show that Bill or Jean objected to Ms. Versluis' attendance at that meeting, indicating further that Irene's shares had not be cancelled, but were instead under control of LSB.
On July 15, 2015, there was another purported Vorhes Ltd. shareholder meeting. Before the meeting, there was a dispute about when the shareholders should hold a meeting. Ms. Versluis sent an email before the meeting stating that Irene's estate was the majority shareholder and objecting to the meeting for a number of reasons. Lynn Kingery, representing the estate of Bernice, responded to that email agreeing that the meeting should not go forward.
Bill and Jean held a meeting anyway. Only Bill, Jean, and Karen Powers, company secretary, were at this meeting. The minutes of the July 15, 2015 meeting say "Shareholders present were Bill Vorhes and Jean Westendorf. Shareholders absent were Bernice Gill and Julie Versluis, LSB, executor for Irene Vorhes' estate." There is no mention of S & V Trust. There also is no indication that Irene's shares had been cancelled or LSB should not attend for Irene's estate.
The meeting minutes state that Bill attended that meeting as a shareholder and voted shares, again contrary to Judge Foy's order. The minutes say nothing about Bill purporting to vote S & V Trust shares. Jean and Bill voted to make Bill
On October 1, 2015, Bernice brought contempt proceedings against Bill. She alleged that Bill had violated the terms of Judge Foy's order. She alleged specifically that Bill continued to attempt to vote his shares and act as an officer of the corporation, even though he had not paid the judgment entered against him.
In October 2015, Bernice died and her daughter, Lynn Kingery, became executor of her estate. The Bernice Gill estate holds shares of the company but Ms. Kingery testified that, because of the present dispute, she could not say for certain how many shares are in the estate. Ms. Kingery became president of Vorhes Ltd. in January 2016 and has remained president since.
On January 8, 2016, Judge Foy held a hearing on Bernice's application to find Bill in contempt for violating Judge Foy's order. Bill testified at that hearing. He admitted that he had participated at company meetings and voted
On February 22, 2016, Judge Foy issued an order finding Bill in contempt of the Iowa District Court. Judge Foy found that Bill did not follow the previous order. Bill had not paid the judgment or returned his shares to the company. Bill also continued to vote his shares in the Vorhes Ltd. and act as an officer of the company. Judge Foy found Bill did all of these things in direct violation of Judge Foy's previous order. As a result, Judge Foy found Bill in contempt of court and expressly stated that if he did not pay the judgment or return his shares to the company, he would be sentenced to 20 days in jail and fined $350.
When confronted with the facts from the State Court contempt proceeding in the trial before this Court, Bill simply said that he did not remember the state court contempt hearing. Bill appeared to admit, however, that March 2016 was the first time he alleged in any public forum that S & V Trust owned the shares since 2013, and not Bill himself.
Bill filed Chapter 7 bankruptcy on December 15, 2016. His schedules show that he does not own any company stock. The Chapter 7 Trustee filed an adversary seeking to avoid any alleged transfer Bill claims to have made of 2,121 shares to S & V Trust as a fraudulent transfer. S & V Trust filed a third-party complaint seeking a determination of the number of outstanding shares, the ownership of the shares, and whether Bill's Chapter 7 bankruptcy estate owns any shares. This Court held a trial only on S & V Trust's third-party complaint, not the Chapter 7 Trustee's fraudulent transfer case.
After trial, the parties filed briefs. On May 17, 2017, immediately after briefs were submitted, S & V Trust filed a motion to strike portions of LSB's brief. The Court held a hearing on that motion on
The disputes here are: (1) whether Bill's alleged transfer of his Vorhes Ltd. stock to S & V Trust on March 11, 2013 was effective; (2) whether there was agreement between all the Vorhes Ltd. shareholders to cancel or retire Vern's and Irene's shares on June 8, 2013; and (3) whether Irene's estate properly had possession of 5,758 shares at the relevant times to this case.
S & V Trust argues that Bill did not own any Vorhes Ltd. shares when he filed bankruptcy. It argues that he transferred his 2,121 shares to S & V Trust on March 11, 2013. It argues that Vern's shares and Irene's shares — which went to Bill, Jean, and Bernice by operation of law — were retired by agreement of the shareholders on June 8, 2013. It also argues that LSB could not still own or control Irene's shares as they were cancelled because they were delivered to the shareholders by operation of Iowa law. On the basis of these arguments, S & V Trust concludes that Bill does not own any shares of Vorhes Ltd., that there are currently 6,363 shares of stock, and S & V Trust, Jean, and the Estate of Bernice Gill each own 2,121 shares.
Ms. Kingery, as executor of Bernice Gill's estate entirely disagrees with S & V Trust. She argues that Bill's attempted transfer of his 2,121 shares to S & V Trust was not effective because it did not follow corporate requirements. She argues Bill and Jean have continued to act as though no S & V transfer occurred. She also argues that there is no credible evidence that all shareholders agreed to cancel or retire the stock from Vern and Irene at the June 8, 2013 meeting.
LSB agrees with Ms. Kingery that the Irene's shares were never cancelled. LSB argues Irene's shares were not transferred by operation of Iowa law. LSB argues it retained possession of this specific bequest for cause because it must still pay estate debts and the costs of administration.
LSB and Ms. Kingery agree that there are currently 16,439.5 shares outstanding. They argue that the current ownership of outstanding stock is as follows: Bill owns 3,560.5 shares; Jean owns 3,560.5 shares; the Estate of Bernice Gill owns 3,560.5 shares; and the Estate of Irene Vorhes has possession of 5,758 shares.
The Court will address the parties' arguments in the following sections.
S & V Trust argues that stock transfer it received from Debtor is valid under Paragraph 7 of the Stock Purchase and Redemption Agreement. That paragraph has been referred to as the "related shareholder" transfer. It provides that any shareholders can transfer to "a Trustee for the exclusive benefit of ... one or more of his children." This paragraph further provides that it "shall override any by-law in
The Bernice Gill Estate argues that Bill created S & V Trust for the benefit of his grandchildren, not children, and Paragraph 7 does not apply. The Bernice Gill Estate argues simply that because Bill's transfer to S & V Trust was for the benefit of his grandchildren, it does not meet the express and clear terms of Paragraph 7 addressing a transfer to "for the exclusive benefit of ... one or more of his
"It is well established that the law of the state of incorporation should determine issues relating to a corporation's internal affairs."
"In general, the articles of incorporation and bylaws create a contractual relationship between the parties."
"An ambiguity exists only if the language of the exclusion is susceptible to two interpretations."
Here, Vorhes Ltd. is incorporated in Iowa. The company's by-laws specify that no transfer of stock will be valid until 90 days after the company receives written notice of the proposed sale and has an opportunity to purchase the shares during those 90 days. On the front of each certificate of company stock, it says: "This stock certificate is subject to a by-law restricting its transfer." In addition, Paragraph 3 of the Stock Purchase and Redemption Agreement says no transfer is effective until after the shareholders give their written consent or the transferring shareholder offers to sell to the company or the other shareholders.
S & V Trust argues that the intent behind Paragraph 7 was to enable transfers to all related family members. The Court need not even address that argument because the provision is not ambiguous. Even if the Court did consider it, there is no evidence to support S & V Trust's assertions about the intent of Paragraph 7. Bill's testimony that "children" includes "grandchildren" is his understanding of that paragraph, nothing more. It does not show that Irene and Vern intended that reading at the time they prepared the documents. The Court finds Bill's testimony on this issue unpersuasive.
Bill's testimony simply does not create an ambiguity where the language is clear. The term "children" is clear, and it does not include grandchildren. The Iowa Supreme Court has essentially rejected the exact same argument that "children" includes "grandchildren."
Contracts and documents are interpreted based on "the words chosen."
A strong preponderance of the evidence, in fact, shows that Bill did not even believe he had properly made the stock transfer to S & V. Bill's own actions and statements in the years since purportedly attempting to transfer the stock to S & V Trust in March 2013 are perhaps the strongest evidence against him. Bill continued to vote his shares as if they were his. The Vorhes Ltd. meeting minutes repeatedly show that Bill owned and voted the shares. There was never a mention of S & V Trust at all — let alone that it was controlling or voting shares. The ruling on the shareholder derivative suit and the ruling finding
Bill claims that "everyone knew" he had made the transfer and that he was voting as General Manager of S & V Trust so it was not necessary to document it in the meeting minutes. This assertion rings hollow in light of the strong evidence to the contrary. Similarly, his claim that he did not know anything about the interrogatory answer in the derivative action that lists him, not S & V Trust, as a shareholder is simply not credible and certainly is not persuasive. Even the transactions purporting to create the S & V Trust are highly questionable given the involvement of Marvin Pullman. All these facts brings Bill's motivation in creating the S & V Trust and his attempted transfer of his shares to S & V Trust into serious question. In sum, all this evidence supports the Court's finding that Bill did not properly transfer any of his shares of stock in Vorhes Ltd. to S & V Trust. Those shares are now part of his bankruptcy estate.
S & V Trust also argues that Vern's 5,758 shares and Irene's 5,758 shares were cancelled or retired at the June 8, 2013 Vorhes Ltd. shareholder meeting. S & V Trust argues that all of the shareholders — Bill, Jean, and Bernice — agreed to cancel or retire the stock at this meeting. S & V Trust argues this cancellation effectively constituted a distribution of the value of the cancelled shares to Bill, Jean, and Bernice. It reasons that, because those three were the only shareholders, the value of the shares would increase equally as other shares were eliminated.
LSB points out that Irene's shares could not have been cancelled because it had possession and control of them when Bill and Jean claim to have voted to cancel or retire them. Even if Bill, Jean, and Bernice already had possession of Vern's shares, Irene's estate remained the single largest shareholder and had no notice of — and could not consent to — the cancellation. Moreover, the Estate of Bernice disputes Bill and Jean's assertion that Bernice agreed to such a cancellation. Thus, Bernice and LSB (on behalf of Irene) could have simply out-voted Bill and Jean on the question if it had been properly presented.
Ms. Kingery disagrees with S & V Trust's argument for a similar, but slightly different, reason. She argues that the minutes from the June 8, 2013 Vorhes Ltd. meeting do not show any cancellation agreement or action. She also argues that, before cancellation or retirement can be affective, the shares at issue must first be transferred back to the company — which never occurred. She argues that such a transfer would require written documentation from the shareholders that they transferred the disputed shares. No such document exists. Ms. Kingery notes that, even if 100% of the shares were represented at this June 8, 2013 shareholder meeting, there is simply no persuasive evidence in the record that the shareholders actually voted to cancel or retire shares at the June 8, 2013 meeting.
S & V Trust argues, in response, that a written agreement to cancel shares is not required under the company's corporate documents. S & V Trust argues that the words "retired non-voting stock" written across stock certificates shows that the shareholders agreed to cancel the stock on June 8, 2013. S & V Trust argues that the
S & V Trust's assertions are contrary to Iowa law properly applied here.
The only evidence in the record that the shareholders agreed to cancel the stock was the testimony of Bill and Jean. This included the explanation of Jean's handwriting on the subject stock certificates. The Court does not find their testimony on this issue to be credible.
Instead, the Court finds the actions of Bill and Jean since the June 8, 2013 meeting more accurately show shares were not cancelled or retired at that meeting. Since the June 8, 2013 meeting, Bill and Jean have never objected to LSB claiming possession of Irene's shares. On April 6, 2015, Ms. Versluis attended a Vorhes Ltd. meeting for LSB as executor for Irene's estate. Neither Bill nor Jean objected. In an email exchange, Ms. Versluis stated that the Irene Vorhes Estate was the majority shareholder of the company. Jean never disputed this statement. On July 15, 2015, there was a disputed shareholder meeting that only Bill and Jean attended. However, the minutes from that meeting specifically describe "Julie Versluis, LSB, executor for Irene Vorhes' estate" as an absent "shareholder." If Bill and Jean really believed they properly cancelled the shares of Irene, surely they would have objected to representatives of Irene being present at meetings or statements about Irene's estate holding the largest number of shares. They also surely would not have described LSB as executor for Irene's estate and shareholder, if they had cancelled those shares.
Jean's handwriting on the shares is far from conclusive evidence of what happened at the June 8, 2013. Her handwriting on the certificates does not show that (1) Bernice agreed to cancel the shares or (2) that any such agreement occurred on June 8, 2013. There is no document showing Bernice's agreement to cancel shares. In light of the Court's finding on the lack of credibility of the testimony of Bill and Jean, the fact that the meeting minutes do not mention cancelling shares, and Bill and Jean's actions since that meeting, the Court finds Jean's handwriting on the shares insufficient to show a valid cancellation or retirement of shares. In sum, the Court concludes that there was no agreement by Vorhes Ltd. to cancel or retire Vern's or Irene's shares at the June 8, 2013 meeting.
S & V Trust attempts to get around the problem of Vorhes Ltd. not having possession of Irene's stock by arguing that LSB
S & V Trust argues Irene's will provided a "specific devise" of her stock. It argues LSB did not receive a court order entitling it to continue possession of the shares beyond the presumed 90-day period. S & V Trust concludes that, without such court order, the shares were automatically delivered to Bill, Jean, and Bernice by operation of Iowa law. Thus, it concludes the shareholders at the June 8, 2013 meeting could have cancelled (and in fact did cancel) the stock of Irene.
S & V argues that Iowa Law in effect at the time of Irene's death was clear and provided:
Iowa Code § 633.355. "[Iowa] courts have consistently held that the term shall in a statute [creates] a mandatory duty, not discretion."
Ms. Kingery and LSB disagree with S & V's reading of law given the facts here. They first argue that Irene's shares were not distributed through cancellation at the June 8, 2013 meeting. Thus, they argue that no action, nor operation of Iowa law, could render them cancelled. They also rely on
This issue was largely or entirely mooted by the determination in the previous section that no cancellation of Irene's stock ever occurred. To the extent it was not fully resolved by those determinations, the Court addresses it now. A court may find "cause" to extend the § 633.355 deadline even after an executor has already retained property past the deadline.
S & V Trust appears to argue that the duty imposed by § 633.355 is actually an automatic transfer by operation of Iowa law and "cause" cannot be made out "after the fact." Under S & V Trust's argument, it would be impossible for an executor to violate that 90-day duty, because delivery by operation of Iowa law would automatically occur. As noted in
The Court repeats that it makes no finding on whether there is currently "cause" under § 633.355 for LSB to continue to retain the shares. The Court only finds that § 633.355 did not automatically cause Irene's 5,758 shares to be delivered to the devisees by June 8, 2013. Thus, cancellation or retirement of her stock was not effective (even if attempted) because Vorhes Ltd. and its shareholders did not possess the stock.
The Court finds that there are currently 16,439.5 shares of company stock outstanding: Bill owns 3,560.5 shares; Jean owns 3,560.5 shares; the Estate of Bernice Gill has possession of 3,560.5 shares; and the Estate of Irene Vorhes has possession of 5,758 shares. When Bill filed bankruptcy, his 3,560.5 shares became a part of his bankruptcy estate.
