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Estate of Marvel

Court of Chancery of Delaware

October 1, 2018

Estate of Harold E. Marvel Register of Wills Folio

          Submitted Date: September 28, 2018

          Craig A. Karsnitz, Esquire

          Eugene H. Bayard, Esquire

         Dear Counsel and Ms. West:

         Pending before me are exceptions to the final accounting for an estate. The exceptant claims that the accounting fails to account for the full value of the decedent's farming business, which the exceptant asserts the decedent owned as a sole proprietorship, and for funds in the decedent's personal bank account, which she alleges was a convenience account, among other issues. The executrix denies all of the claims, responding that the farming business was a closely held corporation in which the decedent was a minority interest holder, that the decedent's interest was properly valued, and the bank account was a joint account and not a convenience account. The purported majority owner of the farming business took similar positions as those taken by the estate related to the business. For the reasons set forth below, I conclude that the farming business was a corporate entity which, given the circumstances, was not improperly valued by the estate. I also conclude the bank account was a convenience account and recommend that the estate's first and final accounting be adjusted accordingly. This is a final report.

         I. Background

         Harold Marvel ("Harold") died on March 22, 2013, leaving four surviving children - Penny West ("Penny" or "exceptant"), Donna Sue McInnis ("Donna" or "executrix"), Rolland Marvel, Sr. ("Rolland"), and Vicky Andrews.[1] Harold's Last Will and Testament (the "Will") was executed on October 8, 2012 and gives specific bequests to Rolland (life interest in a farm referred to in the Will as the "garage property," fixtures and equipment on that property, and all farm machinery and vehicles) and jointly to Harold's daughters (haying equipment, the home property, and the remainder interest in the garage property), among other bequests. He names his four children as residual beneficiaries of his estate.[2] The Will does not mention Beaver Dam Farm, Inc. ("BDF"), a corporation Harold established in 1988 related to his farming business.

         Letters of testamentary were issued to Donna as executrix of Harold's estate (the "Estate") on April 18, 2013. The inventory for the Estate was filed on September 18, 2013, and an amended inventory on January 8, 2014. Both inventories listed Estate property as including the garage property, with Rolland receiving a life interest in the garage property and Donna, Penny and Vicky each having a one-third remainder interest in the garage property; a home property, with the three daughters having a one-third interest in that property; a 49% interest in Beaver Dam Farm, Inc. (valued at $70, 395.58); money from an insurance check; and farm and haying equipment.[3] The amended inventory listed Harold's PNC bank account as joint property with Donna, while the original inventory listed it as Estate property. The Estate's First and Final Account (the "accounting") was filed on May 15, 2014.[4]

         Penny filed exceptions to the accounting on July 29, 2014, claiming that all proceeds in the BDF bank account at Harold's death were Estate property because Harold was the sole proprietor of the farming business since BDF was defunct at the time of his death; proceeds from BDF's 2013 winter crops, 2013 fall crops, and its 2014 winter wheat crop should be included as part of the Estate; electric bills for the garage property were improperly paid by the Estate; a $3, 200 commission should not be paid to the executrix; Harold's personal bank account was a convenience account and not a joint account with Donna; and Harold's personal cars (and a four digit Delaware license tag) were part of the residuary estate.

         BDF responded to the exceptions on October 8, 2014 and denied that it was defunct since, although its charter was revoked for failure to pay franchise taxes in March 2012, BDF was revived on August 8, 2014 negating its prior void status.[5]BDF also claimed Harold owned 49%, and Rolland 51%, of BDF stock. Further, it asserted that BDF's only asset was its bank account and the executrix and Rolland, the majority owner, agreed that the Estate would receive 49% of the bank account for its interest in BDF. Donna's October 10, 2014 response to the exceptions echoed BDF's responses. Donna also stated that the Estate did not pay any garage property electric bills, the executrix's commission was justified, Harold's personal bank account was a joint account created with Donna, and Harold intended to devise all of his vehicles and tags to Rolland. The trial on the exceptions was originally set for February of 2016, but was continued twice, once at Donna's request and once at Penny's request. On May 19, 2017, the Court wrote to the parties requesting a status report because it was unaware of any case activity since the previous May. Penny's counsel (who withdrew as counsel at that time) and Penny both responded, with Penny requesting a hearing. In July of 2017, Donna and Rolland filed motions to dismiss for failure to prosecute under Court of Chancery Rule 41(e). After briefing, those motions were denied.[6] Additional discovery ensued, a hearing on the exceptions was held on April 10, 2018, and simultaneous post-trial memoranda were submitted by the parties on May 10, 2018. In response to my letter dated August 8, 2016, Donna and Rolland filed additional submissions on September 7, 2018, and Penny provided comments on September 24, 2018. This is my final report.

         II. Analysis

         Court of Chancery Rule 198 specifies the burden of proof in exceptions to an account.[7] Once exceptions are filed in compliance with Rule 198, the burden of proof falls on the executrix to demonstrate that the accounting was properly prepared.[8] That burden shifts, however, where the exceptant seeks a surcharge. In those instances, the exceptant "must demonstrate affirmatively that a surcharge is warranted."[9] Exceptions are addressed by issue below.

         A. Status and ownership of Beaver Dam Farms, Inc.

         Penny argues that BDF was defunct at Harold's death and, since there was no corporate entity, BDF was a sole proprietorship owned by Harold and all BDF assets should be included in the Estate.[10] The Estate and BDF claim that, although BDF was void at the time of Harold's death, it was subsequently revived and that revival eliminated its previous void status. It is undisputed that BDF was incorporated in Delaware in March of 1988; that BDF's certificate of incorporation became void multiple times over the years for failure to file the State of Delaware annual franchise tax reports and/or franchise taxes; and that BDF's certificate of incorporation was revived on three separate occasions.[11] Delaware law provides that the revival of a voided certification of incorporation has "the same force and effect as if its certificate of incorporation had not been . . . void."[12] Such revival validates actions performed by the corporation during the time when the certificate of incorporation was void, and all property that belonged to the corporation when the certificate of incorporation became void (which was not disposed of prior to its revival) is "vested in the corporation, after its revival."[13] Although BDF's certificate of incorporation was void at the time of Harold's death, it was subsequently revived in August of 2014.[14] With that revival, under Delaware law, BDF was treated as if its certificate had not been voided and BDF retained its legal corporate status through Harold's death. Therefore, BDF was not "defunct" at the time of Harold's death and Harold was not the sole proprietor of BDF at that time.

         And, BDF and the Estate assert that Harold owned 49%, and Rolland owned 51%, of BDF. Penny claims that Rolland has not proven his 51% ownership of BDF. No documentary evidence showing the distribution of BDF's shares or ownership has been presented. It is undisputed that Rolland and Harold farmed together for close to 50 years.[15] Wilmer Powell ("Powell"), who was described as a trusted friend of Harold, testified in his deposition that he was "instrumental" in Harold's establishment of BDF in 1988 and prepared tax returns for BDF for approximately three years.[16] Powell also testified that BDF was a "family corporation" with "a father and son ownership of the stock."[17] He further stated that Rolland owned 51% and Harold 49% of BDF stock and that distribution was based upon legal advice that Harold should not be a majority shareholder because of Harold's financial difficulties.[18] Indeed, Rolland testified that he understood he was made majority shareholder of BDF because of his father's financial problems back in 1988.[19]

         Rolland's wife, Paula Marvel ("Paula"), and his son testified at trial that Harold had stated that BDF was jointly owned by Rolland and him, with Rolland owning a majority interest.[20] Rolland testified that both Harold and Powell told him that he owned 51% of BDF.[21] BDF was a closely held family corporation that did not adhere to corporate formalities and its operations, including Harold's use of business funds for his personal purposes, reflected the personal dynamics of the relationship of its two shareholders, a father and son. Harold, as president of BDF, managed the farming business and Rolland followed his lead and was paid wages. BDF's management and compensation does not prove that Rolland did not have a majority interest in BDF. I find sufficient evidence was presented to show that Rolland held a 51% interest in BDF, and Harold held the remainder.

         B. Value of Beaver Dam Farms, Inc.

         In this case, the Estate's share of Harold's 49% interest in BDF was valued at $70, 395.58, [22] or 49% of the funds in the BDF bank account at the time of Harold's death. Penny argues that the Estate's interest in BDF was improperly valued, and that BDF's interest in the 2013 winter crops, 2013 fall crops and 2014 winter crops were not accounted for in that payment. BDF asserts that the typical approach the Court of Chancery uses in valuing a corporation is the capitalization of earnings method.[23] But, it also alleges that BDF's lack of records and record keeping would limit a forensic accountant's ability to value BDF.[24] And, that BDF lost money and had no earnings to capitalize, so the amount the Estate received for its share of BDF exceeded the value of Harold's interest. Further, BDF argues that the sale of Harold's interest would "necessarily require a minority discount," and the Estate's interest in BDF would have to be reduced to reflect that discount.[25]Penny expressed her belief that the limited financial information provided by BDF was not accurate and that correct information would show a profit.[26]

         There are a number of approaches to valuing an interest in a closely held corporation for purposes of "cashing out" a shareholder. Valuation of corporate shares is "not a mechanical or rigid endeavor" and centers on ensuring that the shareholder receives the "fair or intrinsic value of his shares."[27] Courts have recognized that "certain characteristics of family-owned or closely-held corporations make valuation of a stockholder's interest difficult."[28]

         The problem with valuing BDF in this case is that there is very limited financial information available about BDF. As suggested by BDF, the capitalized earnings method is one approach that has been used by this Court in determining the fair value of the corporate shares, "especially for companies with significant intangible assets and few fixed assets."[29] To rely on that method, "two basic inputs [are required]: a measure of the company's earnings and a capitalization rate."[30]The information needed to use the capitalized earnings valuation method is not available in this case.

         It is undisputed that BDF operated as a small family business in every sense - one in which Harold, the father, was the decision-maker and Rolland, the son, helped to effectuate those decisions. I also recognize that, at this point - five years after Harold died - it would be difficult, if not impossible, to develop reliable financial records for BDF sufficient for experts to effectively perform a valuation of the business.[31] Given the limited information available, I conclude the Estate's interest in BDF should be valued based upon its proportional share of BDF's assets.

         BDF had limited assets - at the time of Harold's death, it had $143, 664.45 in its checking account and did not own any real property or farm equipment.[32] Post-trial, I offered the parties the opportunity to submit additional information to assist in the valuation determination. BDF submitted income and expense information for the period of March 22, 2013 to June 18, 2014. Considering BDF's earnings over that period (which is the only earnings information provided), it appears BDF's income approximated its expenses.[33] This information provides some insight into BDF's general financial condition (which did not appear to be strong at that time), but it is not particularly useful in valuing the Estate's share since it covers the time period following Harold's death, rather than before his death, and is limited in scope.

         At the time of Harold's death in March 2013, BDF's winter crops were in the ground - they had been planted between October and December of 2012 and were harvested in June or July of 2013.[34] Any profit from those crops should, proportionately, be included as part of BDF's assets for the purpose of valuing the Estate's share of BDF. However, the evidence does not indicate that those crops were profitable. The record shows that revenue from the 2013 winter crops was approximately $36, 899.09, and expenses associated with producing those crops were comparable.[35]

         Although Peggy asserts that revenue associated with later BDF crops should be considered in valuing the Estate's share of BDF, I do not find it fair to consider earnings from crops grown in the fall of 2013 or winter of 2014, after Harold died. Not only is revenue and expense information about those crops not readily available in the record, but no investments had been made in those crops (or expenses incurred) at the time of Harold's death. Following Harold's death, BDF operations fell solely on Rolland, and not on the Estate, so the Estate's investment in those crops, and rights to profit from those crops, have not been proven.

         BDF argues that a minority discount should be applied in determining the value of the Estate's share of BDF, a closely held corporation. Its expert valuation stated that "[v]alues of closely held securities usually include discounts for lack of marketability," which are determined based upon "[v]arious empirical studies."[36]And, that it is not uncommon for minority discounts to range from 10-40%, which "severely and negatively" impact the value of minority interests in closely held entities.[37] However, no information or studies have been provided to show that a specific minority discount is warranted in this case. The general circumstances appear to indicate that Harold's minority interest would likely be discounted but, without supporting information, I do not find a basis for applying such a discount.

         In summary, I conclude, in this case, the approach to fairly valuing the Estate's share in BDF is to divide BDF's assets proportionally between its two shareholders, Rolland and the Estate. This was the approach reflected in the Estate's accounting.[38] The evidence shows that BDF's only confirmed assets, at the time of Harold's death, were the funds in its banking account and its crops in the ground. Since there is no evidence that those crops were profitable, the value of the Estate's share is its proportional share of BDF's bank account. Sufficient information on BDF's finances is not available to rely on other valuation methods used for closely held corporations, such as the capitalized earnings method, or to apply a specific minority discount here. If the value is as BDF's expert opined - that the Estate's interest in this case "is likely to be worth only what the majority interest is willing to pay for it," then that criteria has been met because Rolland agreed to the proportional division of BDF's bank account.[39]

         C. Harold's personal bank account with Donna

         Penny argues that Harold's PNC bank account ("PNC Account") was a convenience account and that the funds became part of the Estate at his death, while the Estate asserts that it was a joint account with Donna and the funds passed to her at Harold's death. Bank records show that the PNC Account, which held $9, 036.93 at Harold's death, was titled in the names of Donna, Harold and Jean Marvel (Harold's deceased wife).[40]

         A convenience account is created by the true owner of the funds when he adds names of other persons on the account so that those persons can access the funds in the account if the owner is incapacitated and the funds are needed for his benefit.[41] If the PNC Account was a convenience account in this case, Donna was intended to have access to the account to make expenditures for Harold's benefit, but would not have the right to keep the funds at Harold's death. If it was a true joint tenancy, then the funds in the PNC Account passed to Donna and not to the Estate. The ownership of bank accounts as joint tenancies with right of survivorship are not favored in Delaware and there is a rebuttable presumption that the bank account is owned as tenants in common unless the person "makes [his] intentions explicit in the language used to create title to the property" that he intends to create a joint tenancy with right of survivorship.[42] And, a transfer of property for no consideration between close family members, such as between a parent and child, is "presumed to be a gift."[43]

         The starting point in this analysis is the language in the bank documents: if the financial document creating the PNC Account includes "clear and definite language" showing that Harold intended to create a joint tenancy with right of survivorship, then "parol evidence may not be admitted to vary the terms of the instrument."[44] In this case, the PNC Account does not contain clear language showing that Harold intended to create a joint tenancy with right of survivorship with Donna. There is nothing on the signature card, or anything in the record related to the bank documents, that shows Harold intended to - or knew that - he was establishing a joint account when he added Donna. The bank information indicates that Donna's signature ...

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