Kershaw v. Kershaw

• Court: Alabama Supreme Court
• Writing for the Court: LYONS, Justice.
• Citation: Kershaw v. Kershaw, 848 So.2d 942 (Ala. 2002)
• Decision Date: 25 October 2002
• Parties: Knox KERSHAW II, as executor of the estate of Miriam M. Kershaw, deceased v. Royce KERSHAW, Jr., and Kershaw Manufacturing Company, Inc.

848 So.2d 942

Knox KERSHAW II, as executor of the estate of Miriam M. Kershaw, deceased v. Royce KERSHAW, Jr., and Kershaw Manufacturing Company, Inc.

1011253.

Supreme Court of Alabama.

October 25, 2002.

James N. Walter, Jr., and Richard H. Allen of Capell & Howard, P.C., Montgomery, for appellant.

Richard H. Gill and Shannon L. Holliday of Copeland, Franco, Screws & Gill, P.A., Montgomery, for appellees.

LYONS, Justice.

Knox Kershaw II (hereinafter "Knox") commenced an action in various capacities against his brother, Royce Kershaw, Jr. (hereinafter "Royce"), and Kershaw Manufacturing Company, Inc. (hereinafter "KMC"), arising out of matters occurring with respect to the administration of the estate of their mother, Miriam M. Kershaw. Royce and Knox are the only children of Royce Kershaw, Sr., and Miriam M. Kershaw. The trial court, after a hearing at which testimony was presented, entered a judgment enforcing in terrorem clauses¹ in inter vivos trusts created by Miriam M. Kershaw (hereinafter "Mrs. Kershaw") and in her will. In so holding, the trial court determined that Knox was not entitled to any interest under Mrs. Kershaw's will or under any trust established by her of which he was a beneficiary. The trial court further held that other claims made by Knox were moot. The trial court then severed matters relating to the administration of Mrs. Kershaw's estate and certified the judgment enforcing the in terrorem clauses as final and immediately appealable pursuant to Rule 54(b), Ala. R. Civ. P. Knox appeals. We affirm in part, reverse in part, and remand.

I. Factual Background

Miriam M. Kershaw's late husband, Royce Kershaw, Sr. (hereinafter "Royce Sr."), and his brother, Knox, founded KMC. Royce Sr. and his brother Knox litigated over matters related to KMC for decades. Eventually, Royce Sr. became the sole owner of KMC. Upon Royce Sr.'s death in 1971, the KMC stock passed by inheritance to his family and to family trusts. Mrs. Kershaw received certain shares of cumulative preferred stock of KMC, and she remained a director of the company. Royce and Knox each owned certain shares of preferred and common stock of KMC, and First Alabama Bank of Montgomery (now Regions Bank) owned certain shares of KMC preferred and common stock under the terms of testamentary trusts created pursuant to Royce Sr.'s will.

After their father's death, Royce and Knox began to run the company and discord among brothers reappeared in the second generation. The difficulties culminated in 1983 with an agreement pursuant to which Knox's interest in KMC was purchased for approximately $12 million. At the time of the sale, Mrs. Kershaw, Royce, Knox, and First Alabama Bank of Montgomery entered into an agreement ("the 1983 Agreement"), which includes the following provision:

"6. Sale of Stock or Assets or Merger. Royce Kershaw hereby agrees that during his lifetime

". . . .

"(c) he will not vote his shares of Class A Common Stock of KMC in favor of a sale of all or substantially all of the assets of KMC unless KMC will be completely liquidated and dissolved immediately after any such sale of assets."

Paragraph 12 of the 1983 Agreement provides that it is binding upon and inures to the benefit of the successors, assigns, heirs, and personal representatives of the parties thereto. Not long after the buyout, Knox and the company of which he assumed ownership after the buyout sued Royce and KMC. This Court has considered matters arising from this dispute on at least four occasions.²

Approximately 15 years after the execution of the 1983 Agreement, on November 6, 1998, substantially all of the assets of KMC were sold to Progress Rail Services Corporation. Exercising the right conferred upon her by the 1983 Agreement,³ Mrs. Kershaw had instructed Royce to vote his shares of class A common voting stock in favor of the sale of assets to Progress Rail. Knox maintains that as a result of the sale KMC received funds substantially in excess of those of its debts and obligations that were not assumed by Progress Rail and that the sale resulted in cash to KMC more than sufficient to redeem all of Mrs. Kershaw's stock and debt. KMC was not immediately liquidated as Knox insists it should have been pursuant to paragraph 6 of the 1983 Agreement. Royce, as president and controlling shareholder of KMC, took no action to dissolve KMC, to pay KMC's indebtedness to Mrs. Kershaw, or to redeem any of Mrs. Kershaw's shares of KMC stock.

Mrs. Kershaw executed a will and established three inter vivos trusts of which she was the life beneficiary. (Those trusts are hereinafter referred to as "Trust No. 1," "Trust No. 2," and "Trust No. 3.") Upon Mrs. Kershaw's death on March 2, 1999, Royce and Rodger Davis, Royce's personal assistant and a longtime employee of KMC, became the cotrustees of Trust No. 1. During her lifetime, Mrs. Kershaw had placed her shares of KMC preferred stock in Trust No. 1. Royce is the principal remainder beneficiary of Trust No. 1.

Upon Mrs. Kershaw's death, Knox and Davis became the cotrustees of Trust No. 2. No shares of KMC stock were held in Trust No. 2. Knox is the principal remainder beneficiary of Trust No. 2.

Royce, Knox, and Davis became the cotrustees of Trust No. 3 upon Mrs. Kershaw's death. A marital trust was created for Mrs. Kershaw under Royce Sr.'s will; the corpus of the trust included shares of preferred stock in KMC. Royce Sr.'s will gave Mrs. Kershaw a power of appointment over the assets of the marital trust. In her will, Mrs. Kershaw exercised her power of appointment over the assets in the marital trust created in Royce Sr.'s will and directed that those assets be placed in Trust No. 3. Trust No. 3 provides that all stock held by it in KMC and affiliated entities, and/or any bonds, promissory notes, or other indebtednesses of KMC and affiliated entities be distributed to Royce. Trust No. 3 further requires that property not otherwise distributed shall be divided in equal shares and paid to the trustees of Trust No. 1 and Trust No. 2 for placement in the respective trusts.

Knox contends that had KMC been immediately liquidated in late 1998 as he says the 1983 Agreement required, the assets in the form of KMC stock in the marital trust would have been converted to cash, and upon Mrs. Kershaw's exercise of the power of appointment over the assets of the marital trust in favor of Trust No. 3, that cash would then have been divided equally between Trust No. 1 and Trust No. 2. Under this scenario, Royce, as principal remainder beneficiary of Trust No. 1, and Knox, as principal remainder beneficiary of Trust No. 2, would have shared equally. Thus, according to Knox, if liquidation had occurred, the additional cash in the estate would have increased Knox's inheritance by $1.6 million and diminished Royce's inheritance by the same amount.

Mrs. Kershaw's will names three coexecutors: Royce, Knox, and Davis. Knox retained counsel and challenged Royce's failure to liquidate and dissolve KMC as Knox argues is required under the 1983 Agreement. At Knox's request, counsel for the estate drafted a petition for instructions seeking answers to questions concerning Royce's rights and the obligations he owed the estate under the 1983 Agreement. Royce refused to join in the proposed petition for instructions.

After Royce refused to agree to file the proposed petition for instructions, Knox sought the advice of disinterested counsel on the issue of Royce's alleged breach of the 1983 Agreement and the possibility of a claim against the firm that had provided independent legal advice to Mrs. Kershaw. Knox was advised that he had standing to bring a proceeding in good faith with respect to the 1983 Agreement and that it was a case that could be successfully brought. He was further advised not to bring an action at that time against the firm that had represented Mrs. Kershaw. After further negotiations with Royce were unsuccessful, Knox brought the action now before this Court.

II. Course of Proceedings

Knox filed a claim in the probate court asserting that the estate had claims against Royce and KMC related to the 1983 Agreement. Knox subsequently filed this action in the circuit court in his capacities as coexecutor of the estate, as cotrustee of certain trusts Mrs. Kershaw created, and in his individual capacity as a beneficiary. He named Royce, individually, and KMC as defendants. Knox then removed the administration of the estate to the circuit court. In the circuit court action, Knox alleged breach of contract, tortious interference with an inheritance, and breach of fiduciary duty. He also sought a declaratory judgment and other relief. In the declaratory-judgment portion of his complaint, Knox asked the court to determine the effect of the liquidation provision in the 1983 Agreement, the proper allocation of over $4 million in estate-tax liabilities, and the proper use of proceeds from life insurance policies on Mrs. Kershaw's life purchased by KMC in 1974 and 1983 and payable to KMC. Knox claims that the policies were purchased to provide liquidity to Mrs. Kershaw's estate. According to Knox, the proceeds of approximately $1.4 million in life insurance payable to KMC were intended to enable KMC to redeem Mrs. Kershaw's preferred stock at her death. Had this occurred, he says, the proceeds of the sale could then have been distributed equally between Knox and Royce, as principal beneficiaries of Trust No. 1 and Trust No. 2, rather than the KMC stock remaining an asset in Trust No. 3, which, according to its terms, must be distributed to Royce.

When Royce and Davis, in their capacities as cotrustees and coexecutors, refused to join in the action as coplaintiffs, Knox filed a petition seeking to join Royce and Davis pursuant to Rule 19, Ala. R. Civ. P., or to dismiss the coexecutors and cotrustees from their duties through a judgment of severance. Royce and KMC moved to dismiss the action.

The trial court...