Bata v. Bata

• Decision Date: 03 August 1960
• Parties: Jan A. BATA, Defendant Below, Appellant, v. Thomas J. BATA, Thomas J. Bata and David Graham, as Executors of the Estate of Mary T. Bata, and Western Investment and Trading Company, Limited, a Bermuda corporation, Plaintiffs Below, Appellees.
• Court: United States State Supreme Court of Delaware

Page 493

163 A.2d 493

39 Del.Ch. 258

Jan A. BATA, Defendant Below, Appellant, v. Thomas J. BATA, Thomas J. Bata and David Graham, as

Executors of the Estate of Mary T. Bata, and

Western Investment and Trading Company,

Limited, a Bermuda

corporation,

Plaintiffs

Below, Appellees.

Supreme Court of Delaware.

Aug. 3, 1960.

George T. Coulson (of Morris, Nichols, Arsht & Tunnell), Wilmington, and Henry Cohen and Daniel M. Sandomire (of Cohen & Sandomire), New York City, for appellant.

Robert H. Richards, Jr. (of Richards, Layton & Finger), Wilmington, and Inzer B. Wyatt, John W. Dickey and Edward C. Stebbins, Jr. (of Sullivan & Cromwell), New York City, for appellees.

SOUTHERLAND, C. J., and WOLCOTT and BRAMHALL, JJ., sitting.

SOUTHERLAND, Chief Justice.

This case presents the latest phase of a long and bitter family struggle for the control of the immense Bata shoe business, a world-wide industrial enterprise founded by the late Thomas Bata of Czechoslovakia. That control is represented by the majority of the shares of stock of Leader, A. G., a Swiss corporation. Bearer certificates for 1,170 of the 2,000 issued shares of Leader are physically in the custody of the Court of Chancery. These shares are owned by two Delaware holding companies, Westhold Corporation and North River Securities Corporation, the shares of which are also in that court's custody.

It is admitted that all of the Leader shares were the property of Thomas Bata at the time of his death in 1932. The present claimants to the property in suit are (1) Thomas Bata's son, Thomas J. Bata, and the estate of Thomas Bata's widow, Marie T. Bata, on the one hand; and (2) Jan Bata, half-brother of Thomas Bata, on the other.

For convenience Thomas Bata, Sr. will be often referred to in this opinion as 'Thomas'; his son and widow as 'Tom' and 'Marie', or as 'plaintiffs'; and Jan Bata as 'Jan' or 'defendant'.

Litigation growing out of the dispute has been going on for thirteen years. Certain aspects of the case have been decided by the courts of the State of New York, the courts of the Netherlands, and the courts of Switzerland.

The Delaware litigation was brought by Tom and his mother's estate in March 1954, against Jan. There are other parties to the suit, both plaintiffs and defendants, but for our present purpose their status in the litigation is unimportant.

After a trial of 100 days, the Chancellor on February 14, 1958, filed an opinion awarding the disputed shares to plaintiffs. Bata v. Hill, Del.Ch., 139 A.2d 159. After further hearings with respect to claims and the form of the decree, final judgment was entered on September 26, 1958. Jan appeals.

Background of the case prior to 1930.

Before dealing with the legal issues before us, we must sketch the factual background of the case.

Thomas Bata was born in 1876 in Moravia, then part of the Austro-Hungarian Empire, later a part of the Republic of Czechoslovakia. The Bata family had been shoemakers for generations.

In 1894 Thomas and a brother and a sister formed a partnership to engage in the shoe business at Zlin, in Moravia. After 1908 Thomas was the sole proprietor. The business thrived. By the time of the First World War it had become the largest producer of canvas shoes in the Empire. During the war the business continued to expand throughout the Empire, so that after the war Thomas had branches of the business in nearly all of the countries that came into being after the dissolution of the Empire. He also opened retail stores in Poland, Roumania, and other countries. These enterprises he carried on in the names of various relatives or associates--a forecast of the secrecy that, to some extent, was to characterize all his foreign operations.

Early in the 1920's Thomas continued to expand in foreign countries and began the practice of incorporating the newly established branches. His consistent method was to place a majority of the shares of each company (about sixty per cent) in his wholly-owned Dutch Company, 'Bata Best'. Some of the minority shares were registered in his name; others were bearer shares. His holdings of the minority shares, whether registered or bearer, were reported to the Czech authorities.

The profits of these foreign companies were accumulated as bank balances kept in the foreign countries. These profits were kept secret, and were recorded only in private records kept in Zlin (first by Thomas By 1931, one year before his death, the value of the business was between $30,000,000 and $45,000,000.

himself and later by Cipera), and called the 'Export Department' of the Lynn, Massachusetts corporation, although they had nothing to do with the Lynn company.

During these years of growth, and also until he died, Thomas Bata was the absolute owner of the entire enterprise and was its dominating force. He was ahead of his time in his concept of the social responsibility of the owner of great wealth. He built homes for his fellow workers, as well as hospitals and theatres. He maintained a profit-sharing system. Perhaps he may be described as a benevolent dictator. He was called 'The Chief'; all others were 'fellow workers', and there were no titles. His word was law in the organization and at home.

His chief lieutenant was Dominick Cipera. Cipera was related to Thomas by marriage, had been with him since 1919, and held his power of attorney. Close to Thomas also were his half-brother Jan (one of the claimants here) and Muska, his confidential associate in financial matters. Although Jan was his half-brother by his father's second wife, there was a substantial difference in age, and it seems probable that Thomas treated Jan more as a younger son than as a contemporary. In 1909 Jan went to live with Thomas, and remained with him for ten years. He became one of Thomas' trusted lieutenants.

Thomas had married in 1912. His home life was entirely happy and he was apparently devoted to his wife. She was a charming and attractive woman, but with no knowledge of or interest in business. Tom was their only child. Thomas took great interest in his son's development, supervised his education, and, as the Chancellor found, was evidently 'grooming' him for an important place in the business.

The formation of Leader.

It is evident that by 1930 Thomas had decided to effect a reorganization of his farflung industrial empire. But he faced a serious problem.

The large profits of the export business have been referred to. The foreign balances ultimately totaled more than $7,000,000. These profits were never remitted to the Czech company, and were not even carried on the books of any of the foreign companies. The only record of them was kept in Zlin. No taxes had ever been paid on them. This method of handling the money was in violation of the Czech laws relating to the repatriation of foreign balances, and, of course, in violation of the revenue laws.

Accordingly, in establishing a holding corporation for the great Bata enterprise secrecy was required. The solution was found in the creation of Leader, a Swiss corporation. It is reasonably apparent, as the Chancellor said, that Thomas sought the 'financial asylum' of neutral Switzerland in the 'political and economic turmoil' of the time; and that in so doing he was motivated both by a desire to conceal his assets and by an intent to evade taxation. Accordingly, on the advice of Swiss counsel, Dr. Wettstein of Zurich, Leader was formed, with a capital stock of 2,000 bearer shares.

A majority of the shares of each of the Bata companies outside of Czechoslovakia was transferred to it, as well as the foreign bank balances. An arrangement was devised to prevent the disclosure of the transactions. All of the Leader shares (except for four qualifying shares) were delivered to Thomas. He acknowledged receipt of 890 shares for the account of Bata Best, and of the remaining shares for his own account. An elaborate scheme, involving pledges of the shares, was adopted to conceal Thomas' ownership. The Swiss lawyers, appearing to be the stockholders, acted as 'mandatories' for Thomas But the creation of Leader was only a partial solution. What would happen upon Thomas' death? His estate would be confronted with the same problems--not only disclosure of the foreign assets, but also crippling inheritance taxes. There is evidence that he was much concerned about such taxes. The rate applicable to an estate inherited by his wife and son would be 26%; the rate on property left to a brother would be 38%. On the other hand, a tax on a written contract of sale during lifetime would be only 2%. (An oral contract was exempt from tax.)

i. e., were bound to follow his directions with respect to the shares. Although Bata Best entered its holdings of these shares on its books, the certificates were actually deposited in a Zurich bank in the custody of Muska.

In the light of these circumstances Thomas determined upon a very unusual course, as will shortly appear.

Death of Thomas Bata; the memorandum of sale and the will.

Thomas Bata died in an airplane crash on July 12, 1932, at the age of 56. He was in good health and expected to continue in his business. Tom was 17 years old and was working for Bata in Switzerland. Jan was about 34 years of age. He had been in the business for a number of years and had become one of Thomas' trusted associates, though probably not so important a lieutenant as Cipera.

When Thomas Bata died the only key to his office safe was on his person. Cipera obtained it from the hospital and in the afternoon of July 12 the safe was opened by him. There were also present, Jan, Dr. Foerster, the Notary, and others (not including Mary).

There were found in the safe two sealed envelopes. The first was addressed to Jan. It was opened and found to be a memorandum dated May 10, 1931, purporting to evidence a sale to Jan Bata of all of Thomas' property, except certain real estate, for 50 million crowns (about $1,500,000 in...