Egan v. McNamara

• Decision Date: 06 October 1983
• Docket Number: No. 81-1271.,81-1271.
• Citation: 467 A.2d 733
• Parties: Thomas J. EGAN, as Executor of the Estate of Paul J. Rohrich, et al., Appellants, v. Richard V. McNAMARA, Francis J. Bowman, Answering Service, Inc., Appellees.
• Court: D.C. Court of Appeals

467 A.2d 733

Thomas J. EGAN, as Executor of the Estate of Paul J. Rohrich, et al., Appellants, v. Richard V. McNAMARA, Francis J. Bowman, Answering Service, Inc., Appellees.

No. 81-1271.

District of Columbia Court of Appeals.

Argued April 22, 1983.

Decided October 6, 1983.

COPYRIGHT MATERIAL OMITTED

William E. Fay, III, Washington, D.C., and Thomas P. Brown, III, Bethesda, Md., for appellants.

Kenneth Wells Parkinson, Washington, D.C., with whom David H. Cox, Washington, D.C., was on brief, for appellees.

Before NEWMAN, Chief Judge, and MACK and FERREN, Associate Judges.

NEWMAN, Chief Judge:

Simply stated, this is an appeal from the trial court's order upholding the validity of a buy-sell agreement entered into by Paul J. Rohrich (Rohrich), Richard V. McNamara (McNamara), Francis J. Bowman (Bowman), and Answering Service, Inc. (ASI). Appellants, the Executor and the Estate of Rohrich, challenge: (1) the trial court's refusal to find a fiduciary relationship between McNamara and Rohrich regarding the buy-sell agreement; (2) the trial court's failure to require ASI to continue to redeem stock under a corporate resolution permitting redemptions in conformity with Section 303 of the Internal Revenue Code; (3) the trial court's refusal to construe the buy-sell agreement to require installment payments; and (4) the trial court's approval of the inclusion of certain shares owned by McNamara and Bowman in the valuation of ASI stock at the time of Rohrich's death. We affirm.

The particular issues on appeal arise from the following events. ASI was incorporated in Delaware on December 31, 1958. Two days later the newly constituted corporation issued all its stock (250 shares at $100 par value) to Wesley I. Steele (Steele) and Rohrich as joint tenants with right of survivorship. Some years later Steele died, leaving Rohrich as the sole owner of all 250 shares.

Following Steele's death, Rohrich asked McNamara to give up his private law practice and to join ASI as officer, director, and general counsel.¹ McNamara agreed to do so upon ASI's guarantee of certain conditions.² Rohrich, in his capacity as Executor of Steele's estate, also asked McNamara to assist in the administration of that estate. Although McNamara agreed to do so, it soon became apparent that Steele's status as a New Jersey domiciliary and the fact that his property was dispersed in New Jersey, New York, Pennsylvania, Florida, and the District of Columbia, required that counsel licensed in those jurisdictions be engaged to represent the estate. McNamara prepared a list of attorneys with the requisite qualifications from which Rohrich chose Bradley Walls (Walls) to represent him as the executor of Steele's estate. Walls, in turn, delegated the responsibility of representing the estate to his associate, John Keegan (Keegan). McNamara received no compensation for the assistance he provided Rohrich regarding the Steele estate and had no power of attorney to represent the estate before the Internal Revenue Service. To provide additional assistance in connection with the administration of the Steele estate, Rohrich hired William C. Sabin (Sabin), a CPA and tax partner with Arthur Young & Co. Sabin has a law degree and is an expert in the field of taxation.

As the owner of all ASI's stock following Steele's death, Rohrich had personal "transferee" liability for a portion of the federal estate taxes due on the Steele estate. In order to secure for Rohrich the cash to pay these taxes, ASI's Board of Directors³ established a stock redemption plan on January 1, 1971, in conformity with Section 303 of the Internal Revenue Code. As a result of several redemptions over the succeeding years, Rohrich's ownership of the 250 shares of ASI stock decreased until, at his death, he owned 169 shares.

During the course of the administration of the Steele estate, Rohrich began to give consideration to the development of a plan for his own estate. The will that McNamara had drafted in 1965 had set up a charitable trust to receive the corporation's stock at Rohrich's death in the event that Steele predeceased him. Due to changes made by the Tax Reform Act of 1969, however, the trust would no longer be able to hold the stock, thus forcing its sale. To remedy the problem, Keegan prepared a new will nominating McNamara as co-executor and providing for the transfer of all Rohrich's assets to a newly established charitable foundation. McNamara and others were named trustees of the foundation. Rohrich executed the will on April 23, 1971, together with a codicil prepared by McNamara.

McNamara testified that during this period of extensive estate and corporate planning, Rohrich said he had two major concerns. The first was the continued existence of ASI after his death, and the second, his retention of full control of ASI during his lifetime. With these objectives in mind, Rohrich caused ASI's Board of Directors, on June 1, 1971, to amend the corporation's Certificate of Incorporation to increase the authorized stock to 1250 shares. Bowman, who had been Rohrich's and Steele's secretary, and McNamara then purchased ten shares each of the newly authorized stock. They each provided consideration of $22,880 in the form of a cash downpayment of $2,288 and a promissory note due June 30, 1981. This was done on November 18, 1971, four days before the November 22 filing of the Certificate of Amendment. Thereafter, Bowman and McNamara made four annual payments of $2,288 each on their notes. The notes were paid in full on December 31, 1975.

Rohrich also decided that a buy-sell agreement would further his objectives.⁴ He conferred several times with Sabin, who then prepared a buy-sell agreement. McNamara testified that he reviewed the document, that he transmitted a copy of it to outside counsel for review, and that he told Rohrich to seek the opinion of outside counsel as to it. McNamara testified further that he expressly told Rohrich not to rely on him as counsel since he was party to the agreement.

On June 4, 1971, ASI, Rohrich, Bowman, and McNamara entered into the buy-sell agreement (Agreement). The Agreement, as was intended, restricted the transferability of stock and required the corporation to purchase the stock of any deceased or withdrawing stockholder. In addition, it contained a provision stating that it did not prohibit the redemption of Rohrich's stock, for Section 303 purposes, on behalf of Steele's estate. The Agreement also contained the following provisions regarding when and upon what terms ASI would purchase shares:

Upon the death of any stockholder, the Corporation [ASI] shall purchase . . . all of the common stock of the deceased stockholder.

* * * * * *

As soon as the purchase price of the decedent's common stock has been determined, the Corporation shall pay . . . an amount not in excess of the purchase price. . . . In no event shall the amount referred to in the preceding sentence be less than 1% of the purchase price.

The amount by which the purchase price exceeds the amount paid . . . shall be satisfied by the Corporation no later than 15 years from the date of death. The amount of such excess shall be evidenced by the Corporation's 4% Promissory Note payable in intervals of no less than one year, beginning with the date of death (emphasis added).

Rohrich died on December 7, 1975. ASI then purchased his 169 shares of stock at $5,733 per share in accordance with the formula provided in the Agreement. That formula set the purchase price at "the book value of all of the outstanding common stock of the Corporation as of the year immediately preceding the date of death or a capitalization rate of 12½ percent of the prior five years earnings. . . ." According to Sabin's calculation, then, there was a total of 193 shares outstanding as of the end of 1974, the year preceding Rohrich's death. Included in that figure were the twenty shares owned by McNamara and Bowman. ASI made a payment to Rohrich's estate of $9,787.62 (one percent of the purchase price) and executed a promissory note for $968,974.19. After Rohrich's death, ASI refused to make any further payments of federal estate taxes due on the Steele estate.

On March 9, 1976, ASI, McNamara, and Bowman filed a complaint for interpleader, injunctive and declaratory relief. The complaint sought a determination of which defendant, if any, was entitled to the assets of Paul J. Rohrich, deceased, then in the possession of Kenneth Wells Parkinson (Parkinson), Trustee. The defendants were the Estate of Paul J. Rohrich, the American Security and Trust Company (the nominated co-executor of Rohrich's Last Will and Testament, dated December 3, 1975, which subsequently renounced its nomination), Thomas J. Egan (Egan) (the nominated coexecutor), and William Arthur Weckesser (the primary beneficiary of numerous testamentary instruments executed during the last days of Rohrich's life).

On July 6, 1979, Egan filed suit against McNamara, Bowman, and ASI. The complaint sought to rescind or reform the Agreement, to require the return of Rohrich's stock, and to require that ASI pay the estate taxes still due and owing with respect to the Steele estate. The last request for relief was based upon the stock redemption resolution of January 1, 1971. The two actions were consolidated. After an eight day trial, the court denied all Egan's claims for relief. The court found the Agreement valid and ordered ASI, McNamara, Bowman, and Parkinson to deliver and pay over to Egan: (1) all of the money paid by ASI into a certain trust account held by Parkin son, as trustee, plus all interest earned thereon; and (2) the original promissory note from ASI, payable to the Estate of Paul J. Rohrich, in the sum of $968,974.16 dated January 30, 1976.⁵

Appellants cite several errors in the trial court's decision. Their overarching theory, however, is that McNamara breached his fiduciary duty to Rohrich and that the breach requires rescission of...