Jordan v. Smith

• Court: U.S. District Court — Northern District of Georgia
• Writing for the Court: FORRESTER
• Citation: Jordan v. Smith, 596 F.Supp. 1295 (N.D. Ga. 1984)
• Decision Date: 05 October 1984
• Docket Number: Civ. A. No. C82-2312A.
• Parties: Catherine C. JORDAN, Catherine Jordan Beal, and Robert A. Jordan, Plaintiffs, v. Paul W. SMITH, et al., Defendants.

596 F. Supp. 1295

Catherine C. JORDAN, Catherine Jordan Beal, and Robert A. Jordan, Plaintiffs, v. Paul W. SMITH, et al., Defendants.

Civ. A. No. C82-2312A.

United States District Court, N.D. Georgia, Atlanta Division.

October 5, 1984.

COPYRIGHT MATERIAL OMITTED

Michael Mears, McCurdy & Candler, Frank J. Rhoads, Jr., Weekes, Candler, Sams, Weatherly & Shinall, P.C., Decatur, Ga., for plaintiffs.

Harry L. Cashin, Jr., James D. Spratt, William T. McKenzie, L. Joseph Loveland, Michael C. Russ, King & Spalding, Barry S. Mittenthal, Meade Burns, Long, Weinberg, Ansley & Wheeler, Atlanta, Ga., for defendants.

ORDER

FORRESTER, District Judge.

This case is presently pending before the court on four motions for summary judgment, three of which were filed by defendants. The complaint alleges violations of the Securities Exchange Act of 1934, and several pendent state claims set out below. Oral argument was heard on all motions for summary judgment on March 2, 1984, and the case is now ripe for ruling on those motions.

A. THE FACTS.

The operative facts that are not in dispute are as follows. Paul W. Smith and William N. Jordan were the founders and co-owners of Southern Oxygen Supply Company (SOSCO), with each individual owning 50% of the stock at the time of the corporation's formation in 1950. On May 31, 1971, Jordan and Smith entered into an agreement that provided for the redemption by SOSCO of Jordan's stock interest. This agreement is reproduced in full below:

"1. William M. Jordan does hereby agree to sell to the Company and the Company does hereby agree to purchase from William M. Jordan the common stock of the Company now owned by Jordan to be purchased by the Company at the rate of Twenty-Five Thousand ($25,000.00) Dollars annually, payable in equal monthly installments beginning June 1, 1971, and on the first day of each succeeding month through May 1, 1991.

"As security for the performance by the Company of its obligations hereunder, Jordan shall and does retain a security interest in all the shares of the common stock presently owned and held by him until the obligations of this agreement have been satisfied by the Company.

"2. Each of the parties to this agreement does hereby acknowledge and recognize this contract to be fully binding upon the Company and each of the several parties hereto and upon any subsequent stockholders hereafter requiring any of the common stock of the corporation or any preferred stock which may be hereafter issued; and it is expressly agreed by the parties hereto that the certificates of stock now outstanding and hereafter sold and issued to any parties shall bear in the margin thereof the following legend: `The stock ownership evidenced by this certificate is made expressly subject to the obligations of a certain agreement between Southern Oxygen Supply Company, Paul W. Smith and William M. Jordan, dated May 31, 1971.'

"3. It is agreed by the parties that the `Key Man' insurance presently owned by the Company now in effect upon the life of William M. Jordan shall be forthwith transferred to Jordan so that hereafter he shall be the owner of such insurance, with all rights therein, including the designation of beneficiary, and Jordan shall pay to the Company such sum as shall be agreed upon between the parties hereto as adequate consideration for the conveyance and transfer of such insurance to him by the Company.

"4. It is likewise agreed by the parties hereto that the automobile presently owned by the Company and in the possession of Jordan shall be purchased by him and title transferred to him by the Company's officers upon payment by Jordan of such consideration as shall be agreed to by the parties.

"5. It is further agreed by the parties hereto that William M. Jordan will be and is hereby employed as a Consultant to the Company and its Board of Directors, effective June 1, 1971, at an annual salary of Ten Thousand ($10,000.00) Dollars, payable semi-monthly for a period of three (3) years, or until the full benefits of the Company's retirement program shall have become payable to him at the attainment by Jordan of the age of sixty-five (65) years.

"The terms and conditions and duties of the employment as Consultant shall be those hereafter agreed to between Jordan and the President of the Company.

"6. It is expressly agreed between the parties hereto that William M. Jordan, during the tenure of his employment as Consultant to the Company and so long as he shall be eligible in any capacity for coverage under the contract providing the medical and disability benefits now in effect will continue to be covered by the medical and disability benefits now in effect and hereafter made effective as to employees of the Company and upon the same terms and conditions as applicable and effective as to him prior to June 1, 1971.

"7. Effective June 1, 1971, Paul W. Smith does hereby agree, together with the Company, to obtain and keep in full force and effect a certain contract or policy of insurance upon the life of Paul W. Smith, with benefits in the face amount of not less than Five Hundred Thousand ($500,000.00) Dollars payable to the Company, the benefits of such policy to be utilized by the Company as earned surplus for the purpose of paying to Jordan in the event of the death of Smith such balance as shall be due Jordan upon the purchase price of Jordan's common stock, as contemplated by this agreement.

"The Company covenants and agrees that it will pay all premiums as the same become due upon said policy and that it will not encumber such policy to any extent which will reduce the benefits payable thereunder to an amount less than the amount remaining due and outstanding upon the purchase price of the Jordan stock as herein contemplated.

"It is further covenanted and agreed by the Company and Paul W. Smith that in the event of the death of Paul W. Smith and the receipt by the Company of the benefits payable under the aforesaid policy of insurance, the full amount then remaining due and outstanding to Jordan will be paid forthwith in full in a liquidation of its obligation under this agreement to purchase said Jordan stock, that is to say, the remaining installments shall be accelerated and due and payable at once.

"8. Subject only to the rights of the creditors of the corporation, other than stockholders, Paul W. Smith, individually, for himself, his heirs, administrators and executors, does hereby waive all statutory limitation provisions relating to surplus and reserves of capital and earnings for the purpose of the performance by the corporation of its obligations under this agreement and does, in this connection, agree and waive any objection to the application of earned surplus and/or capital surplus to the liquidation of the corporation's obligations under this agreement, irrespective of whether such application affects a reduction of the capital surplus, either reserved or unreserved, except that no such distribution or application of corporate assets may be made when such application would render the corporation insolvent to the detriment of its general creditors.

"9. William M. Jordan shall have the privilege, at his option, to re-purchase from the Company his capital stock which may have been paid for by the corporation pursuant to this agreement, upon the occurrence of the total disability of Paul W. Smith or at any other time, by paying without interest to the corporation the amount having previously been paid by the Company to Jordan pursuant to Paragraph 1 of this agreement. In the exercise of this privilege, however, William M. Jordan shall not acquire more shares of the Stock of the Company than are then standing in the name of Paul W. Smith.

"10. This agreement supersedes and is fully intended to extinguish all prior agreements made and entered into by and between these same parties relating to the retirement or re-purchase of any of the stock of the corporation.

"11. Each of the parties hereto does acknowledge, covenant and agree that the provisions of this agreement are binding upon and that the benefits hereunder shall inure to the heirs, assigns, administrators and executors of the individual parties hereto and to the successors and assigns of the corporate party hereto and that this writing constitutes the complete agreement by the parties relating to the subject matters herein dealt with and that, except as otherwise expressly stated, all prior oral discussions, negotiations and agreements are embodied herein and are extinguished hereby as relate to the subject matters embraced within this agreement."

On their 1971 federal income tax return, Jordan and his wife treated the sale of the stock under the agreement as a complete redemption of Jordan's stock interest in SOSCO. Following his retirement, Jordan transferred his interest in certain of the shares in SOSCO to plaintiffs Catherine Jordan Beal and Robert A. Jordan; as of December 22, 1975, pursuant to these transfers, plaintiffs Catherine Jordan Beal and Robert A. Jordan each held 1,536 shares of SOSCO stock.

On June 21, 1978, Jordan died. Pursuant to the terms of his last will and testament, plaintiff Catherine C. Jordan inherited his interest in the 11,136 shares of SOSCO stock held at his death. For federal estate tax purposes, the shares were valued at the price set by the 1971 agreement; no value was ascribed to the re-purchase option set forth in paragraph nine of the 1971 agreement.

On September 30, 1980, Paul W. Smith sold 2,140 shares of SOSCO stock to defendant Lester Nelson; Nelson at that time was the vice president of SOSCO. Also on that same date, Paul W. Smith made gifts to members of his family with each member obtaining 1,070 shares. All of the recipients of this stock are named defendants to this lawsuit.

On January 19, 1981, SOSCO paid plaintiffs Catherine C. Jordan, Robert A. Jordan, and Catherine J. Beal the sums of $223,050.82, $23,903.31, and $11,379.19,...