Application of Ed Phillips & Sons Co.

• Citation: 86 S.D. 326,195 N.W.2d 400
• Decision Date: 07 March 1972
• Docket Number: No. 10835,10835
• Court: Supreme Court of South Dakota
• Parties: Application of ED PHILLIPS & SONS COMPANY for Transfer of the Corporate Stock of Sodak Distributing Company. Lowell SCHMIDT as Commissioner of Revenue, Appellant, v. ED PHILLIPS & SONS COMPANY, Respondent.

Page 400

195 N.W.2d 400

86 S.D. 326

Application of ED PHILLIPS & SONS COMPANY for Transfer of

the Corporate Stock of Sodak Distributing Company.

Lowell SCHMIDT as Commissioner of Revenue, Appellant, v. ED PHILLIPS & SONS COMPANY, Respondent.

No. 10835.

Supreme Court of South Dakota.

March 7, 1972.

Rehearing Denied April 13, 1972.

Gordon Mydland, Atty. Gen., John Dewell, Asst. Atty. Gen., Pierre, for appellant.

M. T. Woods, Woods, Fuller, Shultz & Smith, Sioux Falls, for respondent.

WOLLMAN, Judge.

This is an appeal by the State of South Dakota from a decision of the circuit court for the second judicial circuit which reversed an order of the commissioner of revenue (commissioner) denying Ed Phillips & Sons Company (respondent) permission to acquire the corporate stock of Sodak Distributing Company (Sodak) a South Dakota Class B intoxicating liquor wholesaler.

In July of 1969, R. P. Brzica, Edna Brzica, and Stephen M. Brzica, the owners of all of the shares of stock of Sodak, filed an application with the South Dakota Commissioner of Revenue pursuant to regulation 501.302 of the Department of Revenue's Alcoholic Beverage Regulations to transfer the corporate stock of Sodak to Ed Phillips & Sons Company, a Minnesota corporation having its principal place of business in Minneapolis, Minnesota.

Pursuant to notice, the commissioner held a hearing on the application on October 24, 1969, at which testimony was taken and evidence received.

The commissioner entered findings of fact and conclusions of law and an order denying permission to transfer the stock, whereupon respondent filed a petition for review under the provisions of SDCL 1--26. The circuit court reversed the commissioner's decision and remanded the case to the commissioner with directions to approve and authorize the transfer of the stock of Sodak to respondent.

There was introduced at the hearing before the commissioner in October of 1969 the record of the proceedings had by the commissioner's predecessor (then called the Director of Licensing) in 1952 on the application of the above named members of the Brzica family for a South Dakota Class B liquor wholesaler's license. That record, together with the testimony taken at the October 1969 hearing, reveals that in 1935 a South Dakota liquor wholesaler's license was issued to one Louis Koplow and his brothers doing business in Sioux Falls, South Dakota, under the name of Koplow Brothers, Inc. It appears that this business was originally organized as a partnership but was shortly thereafter incorporated as Koplow Brothers, Inc., some 70% Of the ownership of which ultimately became vested in Ed Phillips & Sons Company, respondent in the present proceedings. ¹

In April of 1950 the Alcohol Tax Unit of the United States Department of Revenue (then the Bureau of Internal Revenue) started an investigation of the activities of Koplow Brothers, Inc. concerning possible violations of the Federal Alcohol Administration Act. It was determined that Koplow Brothers, Inc.'s salesmen were guilty of commercial bribery in that they had given cash, merchandise and alcoholic liquors to managers of municipal liquor stores in South Dakota as an inducement to secure orders for Koplow Brothers, Inc. from these stores. The total value of these gifts to managers or other persons connected with the municipal liquor stores during 1949 and until about July 1, 1950, totaled approximately $87,000. Koplow Brothers, Inc. reached an administrative settlement with the federal government by the terms of which Koplow Brothers, Inc. paid some $87,000 to the federal government.

The South Dakota Department of Revenue also conducted an investigation of these activities by Koplow Brothers, Inc., the result of which was that the members of the Brzica family were permitted to acquire a Class B liquor wholesaler's license in 1952 only after the Koplows and respondent divested themselves completely of any and all ownership interest in Sodak. At the conclusion of the proceedings involving the suspension and reinstatement of the licenses of Koplow Brothers, Inc.'s liquor salesmen in 1952, the then South Dakota Attorney General and the Director of Licensing made statements to the effect that no one who was connected with respondent at the time of the violation of the liquor laws by Koplow Brothers, Inc. should ever be permitted to engage in the liquor business in South Dakota. These statements were made a part of the record at the hearing in October of 1969.

At the 1952 hearing Mr. Jay Phillips, who was then president of respondent, testified that he had no knowledge of the violations of the liquor laws by Koplow Brothers, Inc. The attorney for respondent, who at the time of the October 1969 hearing was secretary and treasurer of the company, testified in 1952 that he had no knowledge of the violations by Koplow Brothers, Inc., notwithstanding the fact that he was one of the trustees of the trusts that owned a substantial interest in Koplow Brothers, Inc. and notwithstanding the fact that he had prepared the corporate minutes for Koplow Brothers, Inc. and sent them to Sioux Falls to be signed and for at least a portion of the time in question kept the corporate records of Koplow Brothers, Inc. in his law office in Minneapolis.

In the same vein, the certified public accountant who audited the books and records of respondent and Koplow Brothers, Inc. during the period of the violations in 1949 and 1950 testified at the 1952 hearing that he had seen nothing in the records of Koplow Brothers, Inc. to cause him to believe that the company was violating any of the federal or state liquor laws even though he had noted the substantial increase in the size of the Koplow Brothers, Inc.' § sample account. The sample account listed the quantity of liquor that Koplow Brothers, Inc.'s salesmen were purportedly using legitimately to introduce and promote new brands of liquors in the retail liquor stores in South Dakota. The then federal regulations permitted the use of such samples only under rather limited circumstances. In fact, the salesmen were using these so-called samples to bribe the managers of the municipal liquor stores to buy their liquor from Koplow Brothers, Inc.

In the 1952 hearing, Louis Koplow, who was president and manager of Koplow Brothers, Inc. during the time of the violations, testified that he took orders from and consulted with Jay Phillips and that he never considered himself in control as such of Koplow Brothers, Inc. He testified that the decisions as to the dividends paid by Koplow Brothers, Inc. and the various lines of liquor that would be handled by Koplow Brothers, Inc. were made in Minneapolis by those persons who controlled respondent. In testifying about his relationship with Jay Phillips during the 17 years from 1935 until 1952, Mr. Koplow stated that 'I would say if Mr. Phillips wanted me to be out, I would be out.' In response, Jay Phillips and the attorney for respondent flatly denied that they or any member of respondent company exercised any such control over Louis Koplow and the other members of the Koplow family who owned stock in Koplow Brothers, Inc.

At the outset of the hearing in October of 1969, the commissioner of revenue said:

'I also note that a former Commissioner of Revenue, not my immediate predecessor, had decreed that all operations of Sodak Distributors should be arms length transactions, as far as Ed Phillips and Sons Company is concerned. I recognize at least, some of the conditions under which these statements were made and something of the conditions which, I believe, existed in the liquor business in South Dakota at that time. Conditions we don't want again revisited on the state or its people but having view and cognizance of all of these factors I believe, in this proceeding that the case rests squarely on the proponents of this transfer, both buyer and seller, to convince me that I would not be making a mistake in exercising the discretion that I have in this matter, in favor of allowing this stock to be transferred to the Phillips Company.'

The commissioner permitted the proponents of the transfer wide latitude in introducing evidence concerning the activities of respondent and of the good character of those connected with the company. Much evidence was introduced showing that Jay Phillips has long been active in community and civic work and that he has given generously to numerous charitable and philanthropic organizations.

The following were among the findings of fact entered by the commissioner:

'V.

'In the Koplow matter certain irregular and illegal acts were carried out under the aegis of Ed Phillips and Sons Company. The officers of which now claim not to have known or have questioned such practices although the records and audits of the Koplow Brothers Company disclose the same.

'VI.

'The Ed Phillips and Sons Company as it exists today with its organizational structure of corporation, foundation and trusteeships is almost intact in its identity of officers, pricipals and stockholders with its situation at the time of, and during the events chronicled in the Koplow Brothers matter.'

The commissioner's conclusions of law stated in part:

'VII.

'The prior activites and interest of Ed Phillips and Sons, Company, Inc., in South Dakota and its complexion, organization and financial structure, in the face of the whole record, and taken with the other matters announced in the memorandum decision, (constitute) sufficient grounds for denial of the stock transfer application.'

The contract for the sale of stock of Sodak to respondent provided in part that unless the Brzicas so consented in writing, respondent could not sell any interest in Sodak to any resident of South Dakota for a period of five years after the closing of the contract. In addition, the contract provided that respondent should employ R. P. Brzica for a period of five years in the same capacity as he...