Helms v. Duckworth
| Decision Date | 19 September 1957 |
| Docket Number | No. 13714.,13714. |
| Parties | Rae E. HELMS, Administratrix of the Estate of Charles W. Easterday, deceased, Appellant, v. Raymond F. DUCKWORTH et al., Appellees. |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
Mr. Benton C. Tolley, Jr., Washington, D. C., with whom Mr. John E. Larson, Washington, D. C., was on the brief, for appellant.
Mr. Geoffrey Creyke, Jr., Washington, D. C., with whom Mr. Henry M. Moore, Washington, D. C., was on the brief, for appellee Duckworth. Mr. J. Mitchell Brown, Washington, D. C., also entered an appearance for appellee Duckworth.
Mr. Philip S. Peyser, Washington, D. C., entered an appearance for appellee National Bank of Washington.
Before EDGERTON, Chief Judge, and WILBUR K. MILLER and BURGER, Circuit Judges.
Appellant, administratrix of the estate of Charles W. Easterday, sued for cancellation of a stock purchase agreement between Easterday and appellee Duckworth, by which the survivor would acquire the decedent's stock in a "two man" corporation. Both parties moved for summary judgment. The District Court granted summary judgment in favor of appellee.
The record discloses that in 1948 Easterday, then age 70, was engaged in business as a roofing and sheet metal contractor, an activity he had pursued for 45 years. Duckworth, then age 37, was employed by a roofing contractor. After negotiations the two men executed a contract in April 1948, calling for the formation of a new corporation with 1500 shares of $10 par value stock to be issued at that time, Easterday receiving 51% and Duckworth 49%. Duckworth was to pay for his shares in cash and Easterday was to pay for his by transfer of business assets. Notes were to be given by the new corporation to Easterday for transfer of other business assets having a value in excess of the cost of his shares. The new corporation was to carry on the business established by Easterday.
The contract also provided for the execution of a trust agreement by which each stockholder would place his stock in trust and agree that on his death (or sooner by mutual consent) his stock would be sold to the survivor or continuing member, "the purchase price of the stock to the other * * * being the par value of $10 per share unless modified by the parties by subsequent agreement."
Shortly thereafter a formal survivor purchase agreement was executed with appellee Hamilton National Bank as trustee. This agreement spelled out the mechanics of purchasing and pricing the stock in these terms:
It is undisputed that in 1948 when the enterprise began the $10 per share figure reflected the real net worth of the company and that as of December 31, 1955, the value of the stock was about $80 per share. There is, however, no evidence that either party ever proposed a change in price in accordance with the trust (survivor-purchase) agreement. Upon the death of Easterday in September 1956, Duckworth tendered to the trustee his check for Easterday's stock priced at $10 per share. Appellant then instituted this suit contending that unless Duckworth agreed to pay the true value of the stock as of decedent's death, i. e., approximately $80 per share, the survivor-purchase agreement should be cancelled.
In support of this contention appellant urges that Duckworth fraudulently induced Easterday to execute the trust agreement by misrepresenting that he (Duckworth) would consent to a periodic redetermination of the stock purchase price; that this misrepresentation violated the confidential relationship existing between the parties, and, in any case, the consideration was so grossly inadequate as to warrant rescission of the agreement.
Appellee Duckworth stands on the letter of his contracts, arguing that there having been no mutually agreed change in the purchase price, the trustee is obligated to transfer decedent's shares at the stipulated contract price of $10 per share.
The basic contract between Easterday and Duckworth and the formal trust agreement implementing it are in general terms typical of agreements made between partners of small businesses or stockholders of closely held corporations where the major stockholders are also the managers of the enterprise.1 In this case, however, three provisions are of special significance: Articles II and III of the trust agreement, quoted above, and a clause in the basic contract of April 1948, which provides:
"It is hereby understood and agreed that the majority stockholders will not vote, or cause to be voted, a dissolution of the corporation or a complete disposition of the assets of the corporation without the consent of the minority stockholders."2
These three provisions in combination had several significant effects:
It is equally clear that the agreement contemplated, upon the initiative of either party, a yearly adjustment of the stock price to conform with the realities of a rising or declining net worth of the corporation. The corporate books were kept on a calendar year basis and the trust agreement provided "during the month of January * * * the parties * * * shall have the right to increase or decrease the sale and purchase price by an instrument in writing * * *." Plainly this implied a periodic bargaining or negotiating process in which each party must participate in good faith. Cf. Chase National Bank of City of New York v. Manufacturers Trust Co., 1943, 265 App.Div. 406, 39 N.Y.S.2d 370, 374.3 Any other interpretation would render the procedure for adjusting the stock purchase price superfluous since parties to a contract can, at any time, mutually agree to renegotiate and modify specific terms or execute a new contract. Furthermore, absent a bona fide promise or intent to bargain in good faith, either party could at will frustrate the agreement since it provided no alternate method of adjusting the valuation if the parties did not agree on an adjusted price. The absence of a good faith intent to bargain would work especially to the disadvantage of the elderly Easterday, since, having surrendered his normal voting position as majority stockholder, including the power to sell or liquidate the corporation, he could only effect a change in the stipulated price by persuading Duckworth in negotiations. This surrender of these normal and usual powers of a majority stockholder becomes especially significant in the relations between the parties. In operation it altered Easterday's position drastically and placed him dependent entirely upon Duckworth's good faith in negotiating any change in the stock price to reflect fairly the true value.
The very heart and core, then, of this agreement was the assumed willingness of each party to bargain and negotiate in good faith whenever called upon to revise the price of the stock. Not unlike the duty to bargain in good faith imposed by statute upon employers and unions, good faith in this context "means more than merely going through the motions of negotiating; it is inconsistent with a predetermined resolve not to budge from an initial position."4 (Emphasis added.) An even higher obligation to bargain sincerely arises under a contract which is not made at arms length, but between parties bearing a relationship of trust and confidence toward each other. Cf. Restatement, Contracts, §§ 497, 498 (1932). While both parties are free to argue and even disagree, each must argue sincerely and in good faith, disclosing all relevant facts, with the hope of reaching a fair agreement and not with a secret intent of preventing agreement. Thus any secret intent on the part of either party to refuse to negotiate fairly and in good faith becomes of vital importance.
We have no way to discern Easterday's intent, if any, as the record is silent. The intentions of Duckworth are not left to speculation or conjecture on this record; they are manifested plainly in his own affidavit, wherein he states:
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