Kornfeld v. Kornfeld , 321 F. App'x 745 ( 2009 )

FILED
United States Court of Appeals
Tenth Circuit
April 9, 2009
UNITED STATES COURT OF APPEALS
Elisabeth A. Shumaker
FOR THE TENTH CIRCUIT Clerk of Court
NANCY KORNFELD; MEREDITH
KORNFELD,
Plaintiffs-Counter-
Defendants-Appellees,
v. No. 08-6131
(D.C. No. 5:07-CV-00438-L)
JULIAN KORNFELD; PATSY D. (W.D. Okla.)
PERMENTER, individually and as
co-trustees of Julian P. Kornfeld
Revocable Trust,
Defendants-Counter-
Claimants-Appellants.
ORDER AND JUDGMENT *
Before McCONNELL, McKAY, and GORSUCH, Circuit Judges.
This case involves a dispute over the ownership of stock in a closely held
corporation. The matter was decided on cross-motions for summary judgment,
*
After examining the briefs and appellate record, this panel has determined
unanimously to grant the parties’ request for a decision on the briefs without oral
argument. See Fed. R. App. P. 34(f); 10th Cir. R. 34.1(G). The case is therefore
ordered submitted without oral argument. This order and judgment is not binding
precedent, except under the doctrines of law of the case, res judicata, and
collateral estoppel. It may be cited, however, for its persuasive value consistent
with Fed. R. App. P. 32.1 and 10th Cir. R. 32.1.
and Julian Kornfeld and Patsy D. Permenter, individually and as co-trustees of the
Julian P. Kornfeld Revocable Trust, have appealed the district court’s judgment.
Exercising jurisdiction under 28 U.S.C. § 1291, we affirm.
I
Julian Kornfeld (Julian), an attorney, established a corporation in 1972 that
eventually became known as the Mernan Royalty Corporation (MRC).
Ms. Permenter served as Julian’s administrative assistant. MRC’s assets
consisted of oil and gas royalties, overriding royalty interests, and other interests.
Julian owned 100% of MRC’s stock until 1987, when he transferred all MRC
stock to his two daughters, Meredith Kornfeld and Nancy Kornfeld, appellees
here, in exchange for a private annuity to commence in 2015. Meredith and
Nancy each received 5,000 shares of MRC voting common stock, but at the time,
Julian did not deliver any stock certificates to them. 1 He continued on as MRC’s
president and, along with Ms. Permenter, the two managed the company and
maintained corporate records until their resignation in 2006. Although Meredith
and Nancy often signed corporate paperwork provided to them by their father,
neither had any meaningful involvement with MRC’s operation during Julian’s
tenure as its president.
1
Although Julian also transferred all of his preferred, nonvoting stock, that
stock is not at issue in this case. All references to “shares” are to MRC’s voting
common stock.
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Meanwhile, in 1990, MRC created an employee stock ownership plan
(ESOP) with Julian as its sole trustee. MRC issued and contributed shares of its
voting common stock into the ESOP until 1996. At that time, the ESOP held a
total of 2,956.41 shares (22.82%), and Meredith and Nancy each held 5,000
shares (38.59% each).
In 1999, Julian signed an agreement of merger on behalf of MRC. In
exchange for $225,000, MRC issued 2,963.47 shares of its voting common stock
to the Alfred D. Goldman SNR-1 Trust in February 1999, and 7,260.82 shares to
the Estate of Alfred D. Goldman in June 1999. The cash involved represented
fees owed to Julian for services as trustee of the Goldman Trust and executor of
the Goldman Estate. In November 1999, MRC issued 75.5 shares of its voting
common stock to each of Julian’s daughters. At that point, the ownership of
voting common stock in terms of percentages was as follows: Goldman Estate,
31.12%; Goldman SNR-1 Trust, 12.70%; Meredith, 21.75%; Nancy, 21.75%; and
the ESOP, 12.67%. 2
It appears that Julian did not inform Meredith or Nancy about the Goldman
merger at the time, and when they became aware of it, things turned litigious.
However, the parties, together with MRC and Jeannie Mitschke, who is Julian’s
wife, entered a settlement agreement in 2004. Among other things, the agreement
amended joint purchase agreements that Meredith, Nancy, Julian, and
2
Percentages have been rounded and do not total 100%.
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Ms. Permenter had entered into for the purchase of bonds and stock:
Ms. Permenter agreed to convey to Meredith and Nancy her remainder interests,
and Meredith and Nancy agreed that upon Julian’s death, a life estate in the
income stream from those investments would be payable to Julian’s wife, Jeannie,
rather than to them. The settlement agreement also provided (1) for the
termination of Julian’s deferred private annuity; (2) for MRC’s redemption and
cancellation of the stock issued in the Goldman merger; and (3) terms for Julian
to repay loans he obtained from MRC on which he was in default. Paragraph
3.3.2 of the agreement pertained to the redemption and cancellation of the
Goldman shares and is at the heart of this appeal. It stated that MRC would
“evidence the payment to Julian, as executor and trustee of the Goldman Entities,
the $225,000 in redemption and cancellation of all of [sic] shares of stock of
MRC held by the Goldman Entities, restoring Meredith and Nan[cy] as the
rightful owners of the [voting common] stock of MRC, as follows:” Meredith
43.66%; Nancy 43.66%; and the MRC ESOP 12.67%. Julian provided stock
certificates to Meredith and Nancy for the first time when the parties met to sign
the settlement agreement in September 2004.
In 2006, Meredith and Nancy entered into an agreement to sell all of
MRC’s stock. When informed of the pending sale, Julian argued that the ESOP
owned 22.55% of MRC voting common stock, not the 12.67% stated in the
settlement agreement. He further contended that he owned 49.75% of the ESOP’s
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shares and that Ms. Permenter owned 11.21%. Meredith and Nancy maintained
that the ESOP owned only 12.67%, as stated in the settlement agreement, and that
nothing in the settlement agreement set out the ownership of the ESOP shares.
The sale of MRC went through in December 2006 for $800,000, but the
buyers deposited $109,998 of the purchase price into an escrow account, to be
distributed once the parties sorted out their dispute regarding the ESOP’s shares.
That sum represented the maximum amount to which Julian and Ms. Permenter
claimed entitlement under their theory of ESOP ownership.
Several months later, Meredith and Nancy filed the underlying diversity
action seeking a declaratory judgment regarding the ESOP shares and damages for
breach of the settlement agreement. Julian and Ms. Permenter filed a
counterclaim requesting a declaratory judgment in their favor. After the parties
filed cross-motions for summary judgment, the district court issued two primary
rulings on the merits, the second of which came after supplemental briefing and a
hearing: (1) that the ESOP owned 12.67% of MRC voting common stock, as
stated in the settlement agreement, because any mistake was unilateral on the part
of Julian, not a mutual mistake; and (2) that based on the credible evidence of
their compensation in the years that MRC contributed stock to the ESOP, Julian,
Meredith, and Nancy each owned 33.33% of the ESOP’s shares, and
Ms. Permenter owned no ESOP shares. The court also denied appellants’ motion
to reconsider its first ruling. This appeal followed.
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II
Appellants challenge each of the district court’s merits rulings. Because
this case was decided on summary judgment, our task is to review the district
court’s decisions de novo, applying the same substantive legal standards. See
Simms v. Okla. ex rel. Dep’t of Mental Health & Substance Abuse Servs.,
165 F.3d 1321, 1326 (10th Cir. 1999). Summary judgment “should be rendered if
the pleadings, the discovery and disclosure materials on file, and any affidavits
show that there is no genuine issue as to any material fact and that the movant is
entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c).
A. The ESOP’s ownership of MRC voting common stock
Regarding the district court’s ruling that, as stated in the settlement
agreement, the ESOP owned 12.67% of MRC’s voting common stock, the central
thrust of appellants’ argument is that, after redemption and cancellation of the
Goldman shares, the parties stood in the same position as they did prior to the
Goldman merger: Meredith and Nancy each owned 5,075.5 shares of MRC voting
common stock, which equates to 38.72% each, and the ESOP owned 2,956.41
shares, which equates to 22.55%. In support, appellants advance a number of
sub-arguments that can be summarized as follows: (1) the redemption and
cancellation of the Goldman stock was the main purpose of the settlement
agreement, and the “correct operation” of a “normal” redemption and cancellation
is that the percentage of ownership of the remaining shareholders increases
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proportionally, Aplt. Br. at 20; (2) the 12.67% figure in ¶ 3.3.2, inserted by
opposing counsel during the exchange of drafts of the settlement agreement, is a
scrivener’s error constituting a mutual mistake that merits reformation of the
parties’ agreement; (3) the ESOP is a “trust and separate legal entity” and was not
a signatory to the settlement agreement, so it cannot be forced to “divest” its
shares, which is the practical result of giving effect to the 12.67% figure, id.
at 13; (4) the ESOP’s stock is specifically excepted from the terms of the
settlement agreement by ¶ 3.6.7; and (5) the stock certificates, which support
appellants’ position regarding the number of shares owned by Meredith, Nancy,
and the ESOP, are prima facie evidence of ownership.
We are not persuaded by any of these arguments. First, while we might
agree in theory that the “correct operation” of a “normal” redemption and
cancellation of stock ordinarily results in an increase in the ownership of the
remaining shareholders when viewed as a percentage, the settlement agreement is
not a normal redemption and cancellation. The parties resolved a number of other
disputes, summarized above, and expressly agreed in writing to a different
percentage of ownership than might result from a “normal” redemption and
cancellation.
Second, assuming it was appellees’ counsel who inserted the 12.67% figure
in an early draft of the settlement agreement, appellants have not met their burden
of proving that this was a scrivener’s error amounting to a mutual mistake of fact
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that justifies reformation. Under Oklahoma law, 3 “[m]utual mistake requires both
parties to labor under the same misconception as to the facts,” Hoobler v. Hanson
(In re Hoobler), 925 P.2d 13, 14 n.1 (Okla. 1996), and “[r]eformation corrects a
mistake between the written document and the actual intent of the contracting
parties,” Okla. Oncology & Hematology P.C. v. US Oncology, Inc., 160 P.3d 936,
947 n.22 (Okla. 2007). To prevail on a theory of mutual mistake, a party must
provide “clear and convincing evidence” that the contract “does not reflect what
either party intended.” Thompson v. Estate of Coffield, 894 P.2d 1065, 1067-68
(Okla. 1995). Here, the numerous drafts of the agreement contained in the record
show that Julian proposed many changes, including to ¶ 3.3, but no changes with
regard to the 12.67% figure of ¶ 3.3.2 contained in almost every draft. Nothing
indicates that appellees’ counsel inserted that figure based on a misconception
shared with appellants as to how the ownership of MRC’s voting common stock
would be allocated among Meredith, Nancy, and the ESOP after the parties settled
their disputes. Indeed, at the hearing, 4 Nancy testified that during the
3
In the settlement agreement, the parties agreed that Oklahoma law governs
any disputes regarding the validity, construction, and enforcement of the
settlement agreement, so we apply the substantive law of Oklahoma. Cf. Yavuz v.
61 MM, Ltd., 465 F.3d 418, 428 (10th Cir. 2006) (“Absent special circumstances,
courts usually honor the parties’ [contractual] choice of law . . . .”) (quotation
omitted).
4
Although the hearing occurred after the district court’s first order
concerning the ESOP’s ownership of MRC stock, the court still had pending
before it appellants’ motion to reconsider. Therefore, Nancy’s testimony is
(continued...)
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negotiations leading up to the settlement agreement, Julian consistently
represented that she and Meredith would have total ownership of MRC, including
through stock held by the ESOP. See Aplee. Supp. App. at 151. This view is
supported by a statement of the parties’ intent in ¶ 3.2.1 of the settlement
agreement concerning the termination of Julian’s deferred annuity: that
“Meredith and Nan[cy] are to own 100% of the stock of MRC without any further
obligation to Julian.” Aplt. App., Vol. I at 49. Nancy also stated that a material
purpose of the settlement agreement was to restore Meredith and her to complete
ownership of MRC because Julian was asking them to forfeit their rights to the
income stream on $2 million worth of bonds in favor of Julian’s wife, Jeannie.
See Aplee. Supp. App. at 150. Accordingly, we conclude that appellants have not
provided clear and convincing proof that the 12.67% figure was a mutual mistake.
Any “mistake” as to the 12.67% figure stems from appellants’ failure to take issue
with that term of the agreement if they disagreed with it, not from a mutual
mistake.
Next, although true that the ESOP was not a party to the settlement
agreement, we do not think appellants may rely on an allegation that the ESOP
was a trust and separate legal entity in order to avoid the effect of the settlement
agreement on the ESOP’s percentage of ownership of MRC’s voting common
4
(...continued)
relevant to the assertion of mutual mistake.
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stock. The district court struck the only ESOP document—four pages of a plan
appellants claimed was fifty-eight pages in length, which they submitted during
summary judgment briefing—on the ground that appellants failed to disclose it
during discovery. Appellants have not contested this evidentiary ruling on
appeal. Thus, regardless of the parties’ apparent agreement that an ESOP existed,
there is simply no record proof regarding its legal status. Because of this, as well
as the fact that all individuals with any interest in MRC or the ESOP were
signatories to the settlement agreement, we conclude that appellants may not rely
on the fact that the ESOP was not a signatory in order to escape the consequences
of their agreement that the ESOP would own 12.67% of MRC’s voting common
stock.
This conclusion is buttressed by the parties’ reference to the ESOP in
¶ 3.6.7 of the settlement agreement, which provides:
Julian shall not, through any action (directly or indirectly) of Julian,
permit Meredith and Nan[cy] as MRC’s current shareholders to at
any time own, legally or beneficially, less than 100% of the
aggregate interest of all classes of capital stock or equity interests of
MRC and Meredith and Nan[cy] shall at all times own at least 100%
of the aggregate interests of all classes of capital stock of MRC,
except for any shares of stock owned by the MRC Employee Stock
Ownership Plan.
Aplt. App., Vol. I at 52. By this provision, the parties asserted the ESOP’s
interest despite the fact that it was not a party to the agreement. But contrary to
appellants’ contention, the last clause of ¶ 3.6.7 does not “except” the ESOP’s
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shares from the terms of the settlement agreement such that the designation of
12.67% is ineffective. Rather, it merely states the obvious: that Meredith and
Nancy would not individually own any stock owned by the ESOP.
Finally, appellants argue that the stock certificates of record show that of a
total of 13,107.41 shares, Meredith and Nancy each own 5,075.5 shares and the
ESOP owns 2,956.41 shares. Based on the stock certificates, appellants contend
that the ESOP owns 22.55%, and that the 12.67% in the settlement agreement is a
“mathematical impossibility.” Aplt. Br. at 17. We disagree. Under Oklahoma
law, “[a] stock certificate is but prima facie evidence of ownership in the person
to whom issued, and is not conclusive and the facts as to the true ownership may
be shown, unless estoppel prevents.” Davis v. Nat’l Bank of Tulsa, 353 P.2d 482,
486 (Okla. 1960) (quotation omitted). 5 Here, the settlement agreement sets out
ownership of MRC stock that conflicts with the stock certificates. As an express
agreement entered into by the parties after issuance of the stock, the agreement
constitutes contrary proof of ownership. Cf. Kirkpatrick v. Jacobson’s Lifetime
Bldgs., Inc., 467 P.2d 489, 490-91 (Okla. 1970) (concluding that evidence of
agreement to pay part of the purchase price of a house with stock was among
5
Although appellants read Davis to require “substantial proof to the
contrary,” Aplt. Br. at 16, we fail to see such a directive in Davis or any other
case applying Oklahoma law. But even if it were a requirement, our conclusion
would remain the same.
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other ample evidence to rebut prima facie evidence of ownership by possession of
stock certificate). 6
In sum, we conclude that according to the express terms of the settlement
agreement, the ESOP owns 12.67% of MRC’s voting common stock.
B. The parties’ ownership of ESOP shares
Appellants raise several arguments regarding the district court’s ruling that,
based on evidence of their compensation, Meredith, Nancy, and Julian each own
33.33% of the ESOP’s shares of MRC voting common stock and that
Ms. Permenter owns none. They first take issue with the district court’s
evidentiary ruling concerning an “allocation record” Julian had prepared. The
allocation record contained a summary of compensation for the years 1990-96 and
indicated the number of ESOP shares allocated to each of the parties in proportion
to compensation during the year of contribution: 49.74% to Julian; 11.21% to
Ms. Permenter; 19.52% to Meredith; and 19.52% to Nancy. 7 As to its genesis,
Julian testified:
6
Appellants also argue that the stock certificates establish ownership of the
shares because appellees did not dispute Undisputed Fact No. 7 of appellants’
motion for summary judgment, which set out the date of contribution, stock
certificate number, and number of shares issued to the ESOP. We reject this
argument, as appellees responded they “have no knowledge or information
sufficient to admit or deny the allegations of” that fact. Aplt. App., Vol. IV
at 1004, ¶ 3.
7
The parties appear to agree that ownership of the ESOP shares is
proportional to their compensation during the years in which MRC issued shares
to the ESOP.
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It was prepared a long time ago. I don’t know exactly when it was
prepared. We had it in the records of the ESOP, because we had to
keep on an annual basis the records of how many shares were
allocated to the participants, which was always proportionate to the
compensation of the participants.
Aplee. Supp. App. at 59. Julian also stated that he discarded the underlying
compensation records for the years at issue because it was his practice to do so
once the statute of limitations under the Internal Revenue Code had run.
The district court ruled that the allocation record was hearsay under Fed. R.
Evid. 801 and not within the exception to the hearsay rule for records of a
regularly conducted activity, Fed. R. Evid. 803(6), because Julian could not say
when it was prepared and because the circumstances of its preparation, including
the fact that there was no credible supporting evidence regarding compensation
claims for certain years, indicated a lack of trustworthiness. The court also noted
that Julian’s testimony regarding bonuses he received in 1990 and 1992 was
“flatly contradicted” by his earlier admission that from 1989 until 2002, he had
taken no salary or compensation from MRC other than $100 per month. Aplt.
App., Vol. IV at 1373 (citing to a memorandum Julian sent to Meredith and
Nancy in 2003 during negotiations leading up to the settlement agreement).
We review evidentiary rulings for abuse of discretion. Abuan v. Level 3
Commc’ns, Inc., 353 F.3d 1158, 1171 (10th Cir. 2003). We conclude that the
district court did not abuse its discretion in excluding the allocation record as
hearsay. Contrary to appellants’ first contention, which unsurprisingly is
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supported by no case citation, the fact that Julian authored the document and
authenticated it by affidavit and testimony does not render it nonhearsay.
“‘Hearsay’ is a statement, other than one made by the declarant while testifying
at the trial or hearing, offered in evidence to prove the truth of the matter
asserted.” Fed. R. Evid. 801(c) (emphasis added). The allocation record fits
within this definition. It is a statement made by Julian, the declarant, other than
while testifying at the hearing; it was offered to prove the truth of the matter it
asserts; and it does not fall within any of the definitions of nonhearsay set out in
Rule 801(d). Consequently, it is hearsay.
Moving to the district court’s ruling that the allocation record did not
qualify as a record of a regularly conducted activity excepted from the hearsay
rule under Rule 803(6), appellants focus on whether the allocation record was
“kept in the course of a regularly conducted business activity” and “made at or
near the time” of the events recorded, both requirements under the rule. But they
fail to address the court’s reliance on the rule’s exclusion of such records if “the
source of information or the method or circumstances of preparation indicate lack
of trustworthiness.” Fed. R. Evid. 803(6). Thus, even assuming that the
allocation record meets the other requirements of Rule 803(6), appellants have
waived any argument regarding the district court’s view that it lacked
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trustworthiness. See State Farm Fire & Cas. Co. v. Mhoon, 31 F.3d 979, 984 n.7
(10th Cir. 1994) (deeming waived issue not raised in opening brief). 8
Appellants also argue that the district court’s reliance on Nancy’s testimony
regarding compensation was improper because the testimony lacked
foundation—Nancy admitted she had little or no knowledge of how MRC was
run, yet testified that she, Meredith, and Julian were paid a salary of $100 per
month for the years in question. Foundation requires a witness to have personal
knowledge of matters about which she testifies. See United States v. Nieto,
60 F.3d 1464, 1468 (10th Cir. 1995). Obviously, Nancy had personal knowledge
of her own compensation. With regard to Meredith’s compensation, the problem
with appellants’ argument is that the evidence they would have us consider
instead, the allocation record, shows that Meredith received $10,000 in 1990, and
$1,200 (i.e., $100 per month) in 1991, 1992, 1995, and 1996. 9 Since Nancy’s
testimony is essentially consistent with appellants’ own position, and appellants
have not advanced any argument or cited to any evidence that Meredith’s
8
Appellants maintain that because appellees did not object to the allocation
record when it was presented with the counterclaim or to its admission at the
hearing, the facts it represents are deemed admitted. These arguments are clearly
belied by the record. In their reply to the counterclaim, appellees denied the
allegations contained in ¶ 9 of the counterclaim, which summarized the allocation
record, see Aplee. Supp. App. at 1 ¶ 8, and challenged the veracity of the
allocation record at the hearing during direct examination of Julian, see id.at 58:22 to 61:6; 64:13-18.
9
The allocation record does not show compensation for the years 1993 and
1994, apparently because no shares were issued to the ESOP in those years.
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compensation was less than $100 per month for the years in question, we think it
inequitable for appellants to now dispute Meredith’s compensation by challenging
the foundation of Nancy’s testimony. Finally, Nancy’s testimony that Julian
earned $100 per month for the years at issue was based on the admission Julian
made in the memorandum he sent to his daughters in 2003 that the court deemed
inconsistent with Julian’s claim to having received greater compensation. Thus,
foundation is not at issue with regard to Nancy’s personal knowledge of Julian’s
compensation, and contrary to appellants’ reply-brief contention, admissions of
party-opponents are not hearsay. See Fed. R. Evid. 801(d)(2). Thus, we see no
reversible error in the district court’s reliance on Nancy’s testimony.
With regard to Ms. Permenter’s ownership of ESOP shares, the allocation
record is the only evidence of her compensation for the years in question. As we
have upheld the district court’s ruling that the allocation record is hearsay, and
appellants presented no other evidence of her compensation, we conclude the
court correctly determined that she was entitled to no percentage of the escrowed
funds.
For their last point, appellants argue that together, Meredith and Nancy are
limited to no more than 50% of the escrowed funds because they never sought
more than that amount in any papers filed with the court until they filed a
supplemental brief just prior to the hearing on their ESOP ownership, when they
asked for 100%. We are not persuaded, as appellees prayed in their amended
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complaint for whatever additional legal or equitable relief they might be entitled
to.
The judgment of the district court is AFFIRMED.
Entered for the Court
Neil M. Gorsuch
Circuit Judge
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