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Sussex Trust Co. v. Pierce

Court of Chancery of Delaware, Sussex County

February 20, 1950

PIERCE et al.

James M. Tunnell, Jr., of the firm of Tunnell & Tunnell, of Georgetown, for plaintiff.

Frederick P. Whitney, of Georgetown, for defendant Samuel C. Pierce, Sr.

David S. Keil, of the firm of Keil & Keil, of Wilmington, for defendant Cape Henlopen Surf Club.

SEITZ, Vice-Chancellor.

This is an action by an executor seeking to have the estate declared the real owner of stock held in the name of another person.

The defendant, Cape Henlopen Surf Club (hereinafter called the 'corporate defendant' or the 'corporation') was incorporated in Delaware in 1939. It leased certain land from the town of Lewes and placed a building thereon. It was necessary to revive another corporation known as Belle [31 Del.Ch. 299] Haven Surf Club in order to procure a liquor license. Pursuant to an agreement with the corporate defendant, Belle Haven Surf Club operated a private club on the land which the corporate defendant had leased.

The Belle Haven Surf Club started operations about September 1940. Some time in 1941 the federal government commenced condemnation proceedings with a resultant cessation in the Club's activities. Later the corporate defendant received a cash payment from the Government for the condemnation of the leasehold interest. This cash is the sole corporate asset and the sole reason for the present controversy.

Both the corporate defendant and the Belle Haven Surf Club were the creatures of either Stephen G. Pierce or his brother Samuel C. Pierce, Sr.

The Belle Haven Surf Club was operated by Stephen G. Pierce (hereinafter called the 'deceased') who was killed in an accident on May 18, 1945. His brother Samuel C. Pierce, Sr. (hereinafter called 'defendant') testified that he (the defendant) took no part in the operation of the Club. In fact, he was a full-time employee of the State Tax Department during this time. He also sold insurance as a side line.

The corporate defendant has only 100 shares of no par capital stock outstanding. Twenty-five shares were authorized to be issued to the defendant on April 15, 1940. The minutes containing the resolution authorizing such issuance were signed by the defendant as secretary. They recite that the stock 'shall be sold' to Samuel C. Pierce, Sr. for the sum of $2,500.00, and 'upon payment of said sum stock certificates

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The minutes of a meeting held on May 8, 1942 contain a resolution which recites that the proper officers of the corporate defendant were 'authorized to issued [sic] in the name of Samuel C. Pierce, Sr.', 75 shares of the corporate defendant's stock, 'said shares to be in lieu of the sum of Nine Thousand Five Hundred Ninety-seven and 39/100 Dollars'. A stock certificate dated May 8, 1942 for 75 shares signed by the deceased as president and the defendant as secretary was offered in evidence.

The defendant, in answering certain interrogatories before trial, reiterated as late as January, 1949 that the 75 shares were issued for the $9,597.39 consideration. [1] However, at the trial, he admitted that he did not give $9,000.00 plus in cash for the 75 shares. Instead, he testified that during the period from April 15, 1940 to May 8, 1942, he rendered services and advanced approximately $1,000.00 in cash to the corporation. The defendant also sought to justify the issuance of the 75 shares of stock to himself on the ground that the deceased took certain property belonging to the corporation and agreed that the corporate defendant was entitled to the sum aggregating $9,597.39. As hereinafter shown, assuming that this testimony was properly admitted, I am not inclined to accept it.

Plaintiff-executor contends that the evidence shows that [31 Del.Ch. 301] the defendant never was the real owner of any of the stock, but held it for the deceased who sought thereby to prevent its possible seizure by his creditors. Plaintiff says that the evidence demonstrates that the defendant could not have advanced a total of $2,500.00 in cash to the corporation for the first 25 shares, and $1,000.00 in cash (plus services) for the remaining 75 shares. Defendant's contention that he received the 75 shares pursuant to an agreement with the deceased is apparently an alternative contention. Plaintiff urges that there is no admissible evidence of any such agreement.

The problem here is rendered particularly difficult because of the close relationship involved, the lack of adequate records and the fact that the deceased also signed one of the stock certificates. My conclusions must be based to a large extent on such probabilities as can reasonably be inferred from the situation generally.

Plaintiff showed the total income of the defendant during the years in question, and for a period of time prior thereto. This testimony indicated that the defendant never earned much over $2,000.00 a year, although he said he always saved cash. Moreover, he provided for a wife and three children. Of real importance, the plaintiff introduced credit statements signed by the defendant in which the defendant indicated that in 1937 he had only $165.00 in cash. A credit statement made out by the defendant in June of 1942 showed a cash position of $300.00. These statement fly directly in the face of his testimony that he always had several thousand dollars in cash. The uncontradicted evidence showed that continously from 1928 through 1942, he owed one bank the sum of $2,500.00, and another bank in excess of $4,000.00. During this period he paid only $75.00 on the entire principal, although he did pay interest. The credit statements fail to reveal any other assets which would support defendant's

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testimony. Defendant did not attempt to explain this apparent incongruity though it [31 Del.Ch. 302] was suggested that he do so. While obviously not conclusive, this evidence is not to be ignored in considering whether the defendant advanced $3,500.00 in cash in a relatively short period of time.

The defendant admitted that he never got any receipts for any of the money advanced to his brother for the corporation, and he admitted that there are apparently no corporate records reflecting his advances, even though he was an official of the corporation during the years when the money was advanced.

The evidence which I have discussed leads me to conclude that the defendant did not have the cash available to make the advances which he states that he made. Moreover, there was testimony of other witnesses which supported plaintiff's contention. While most of these witnesses were 'interested', one of them, who so far as shown, is not financially or otherwise interested, testified that she heard the deceased state that he wanted the defendant to have the stock because he wanted to protect his family and because he did not want the president of the bank, which was a large creditor, to know what he had or get what he had.

Another statement volunteered by the defendant from the witness stand is not without interest. He first admitted that the deceased put money into this project (and perhaps another) and then added that the deceased didn't want his family to get anything he had because of family trouble. This suggests to me that the deceased was perhaps placing the stock in defendant's name for more than one reason. The important thing is that it does not square with defendant's contention that he paid for all the stock. Moreover, defendant does not explain why the deceased would take such an active part in this enterprise and at the same time permit the defendant to be the 100% owner of the defendant corporation and a large owner in Belle Haven.

[31 Del.Ch. 303] The defendant contends that the lack of records is explained by the close relationship which existed between the brothers. Conceding this to be so, the surrounding circumstances lead me to infer that the confidential relationship was used by the deceased as a device to disguise his interest in the venture.

The defendant contends that the 75 shares were issued to him for money advanced by him pursuant to an agreement with his brother relative to the Belle Haven Surf Club; defendant claiming that he was owed over $9,000.00 in this connection. Assuming the admissibility of this testimony, the defendant was very vague in his testimony concerning the alleged agreement. The minutes of the May 8, 1942 meeting at which the 75 shares were issued, and which minutes were signed by the defendant, do not make any reference to a separate agreement. They do not even mention the Belle Haven Surf Club. Moreover, the defendant could not explain the apparent inconsistency between ...

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