Kesling v. Kesling

• Decision Date: 02 May 2012
• Docket Number: No. 45A03–1106–PL–271.,45A03–1106–PL–271.
• Citation: 967 N.E.2d 66
• Parties: Andrew C. KESLING, individually and as Trustee of the Andrew C. Kesling Trust, Appellant, v. Peter C. KESLING, et al., Appellees.
• Court: Indiana Appellate Court

967 N.E.2d 66

Andrew C. KESLING, individually and as Trustee of the Andrew C. Kesling Trust, Appellant,

v.Peter C. KESLING, et al., Appellees.

No. 45A03–1106–PL–271.

Court of Appeals of Indiana.

May 2, 2012.

Thomas G. Burroughs, Ronald G. Sentman, Katz & Korin, PC, Indianapolis, IN, Attorneys for Appellant.

George T. Patton, Jr., Bose McKinney & Evans LLP, Indianapolis, IN, Brent E. Inabnit, Kevin E. Warren, Sopko, Nussbaum, Inabnit & Kaczmarek, South Bend, IN, Attorneys for Appellee Peter C. Kesling.

Robert W. Wright, Dean–Webster Wright LLP, Indianapolis, IN, Shaw R. Friedman, Friedman & Associates, P.C., LaPorte, IN, Carmen M. Piasecki, Thomas H. Singer, Nickle & Piasecki, South Bend, IN, Attorneys for Appellees Christopher K. Kesling, Adam Kesling and Emily Kesling.

OPINION

BROWN, Judge.

In this interlocutory appeal, Andrew C. Kesling, individually and as Trustee of the Andrew C. Kesling Trust Dated March 28, 2001 (the “Trust”), appeals the judgment of June 23, 2011 (the “Judgment”) in favor of his father, Peter Kesling.¹ Andrew raises two issues which we consolidate and restate as whether the court abused its discretion in concluding that Peter was entitled to rescission of agreements entered into on June 25, 2004. We reverse and remand.

The relevant facts follow. In 1955, Harold Kesling, who was Peter's father, along with Peter and Peter's brother David Kesling, founded TP Orthodontics, Inc. (“TPO”), which is in the business of developing, marketing, and selling orthodontic devices.² TPO is a closely held corporation and is organized under Subchapter S of the Internal Revenue Code. At TPO's incorporation, Peter was made the president of the board. Harold's wishes were that TPO would remain a family business.

The corporate by-laws, adopted in 1956, set forth the method for transferring stock in TPO:

(1) By delivery of the certificate endorsed either in blank or to a specified person by the person appearing by the certificate to be the owner of the shares represented thereby; or

(2) By delivery of the certificate and a separate document containing a written assignment of the certificate or a power of attorney to sell, assign, or transfer the same or the shares represented thereby, signed by the person appearing by the certificate to be the owner of the shares represented thereby. Such assignment or power of attorney may be either in blank or to a specified person.

Exhibit 1 at 26.

In 1973, the TPO shareholders entered into an agreement which restricted a shareholder's ability to transfer shares of TPO to a non-shareholder, noting that “the parties desire by mutual agreement to protect the small business corporation classification from destruction due to the transfer of shares to persons not now shareholders.” Exhibit 3 at 1. On July 8, 1993, this agreement was amended and restated (the “Shareholder Agreement”), noting that “all of its shareholders, hereinafter collectively referred to as ‘Shareholders', WITNESSETH:” and reiterating at the outset that “the parties desire by mutual agreement to protect the small business corporation qualification by restricting the transfer of shares to persons not now shareholders” and that “there are now voting and non-voting shares of [TPO] having the same rights and privileges, except voting rights.” Exhibit 4 at 1. The Shareholder Agreement stated the following:

1. Any present Shareholder shall not be limited in the transfer of any of his or her voting or non-voting [TPO] shares to other existing Shareholders of [TPO].

2. Each and all of the Shareholders hereby gives to [TPO] the first right to purchase for cash, or on such terms as may be agreeable to the parties, any voting and/or non-voting shares hereafter offered for transfer to a person not at the time of transfer then Shareholders of [TPO]. This first right to purchase shall cover both voluntary and transfers by operation of law. The said first right to purchase shall exist for a period of ninety (90) days from the date of written notice by a Shareholder to [TPO] of an offer to sell or from the date that any certificates are tendered to [TPO] for transfer to a new Shareholder, whichever is the earlier. Beginning on the ninety-first (91st) day ... the existing Shareholders of [TPO] shall have the right to purchase all of the offered shares as a group, or as individuals. This right to purchase in the Shareholders shall extend for ninety (90) days....

* * * * * *

6. Where a transfer is to occur because of the death of a Shareholder, the first purchase right of the Corporation shall expire at the close of the ninety-first (91st) day (a) after the death of a Shareholder, or (b) after appointment of a Personal Representative of his estate, whichever event is later in time. Death of a Shareholder shall not create a right of purchase in the Corporation where the voting and/or non-voting shares of a deceased Shareholder are bequeathed or distributed by the estate to persons who are existing Shareholders of the Corporation or the gift is to one or more individuals who qualifies under IRS regulations as a Sub–Chapter S eligible shareholder and who will agree in writing to be bound by this Agreement, or any agreement amendatory hereto as a replacement numerically for the deceased Shareholder.

7. Upon failure of the Corporation and individual Shareholders to exercise their rights to purchase within the time limits granted hereunder, the shares offered for transfer and the shares transferred by Will or by intestate succession shall be reissued to the new transferees subject to the terms and restrictions of this Agreement.

8. All existing outstanding voting and non-voting shares shall be endorsed to show that their transfer is subject to the provisions of this Agreement.

* * * * * *

12. This Agreement shall be binding on the parties and their respective heirs, Personal Representatives, successors and assigns....

Exhibit 4A at 1–5.

On September 24, 1999, a special meeting of the Board of Directors was held in which Peter, Andrew, and David were present and in which Peter held a voting proxy for Christopher Kesling; the minutes of the meeting noted that “[a] majority of the directors were present for the transaction of business.” Exhibit 5A. At the meeting, a variety of topics were addressed including “a proposed resolution governing requests to transfer shares into the name of a revocable trust.” Id. The following resolution (the “1999 Resolution”) was unanimously adopted:

“WHEREAS, David L. Kesling and Sharon F. Kesling have requested transfer of their shares of [TPO] stock into certain revocable trusts;

WHEREAS, it is likely that other shareholders will also desire to also transfer shares into revocable trusts;

WHEREAS, the Corporation has a stock purchase Agreement dated July 8, 1993, which restricts transfer of the shares to persons who are not presently shareholders of the Corporation; and

WHEREAS, it is in the best interests of the Corporation to develop a policy for handling such requests for transfer of shares to a revocable trust.

NOW, THEREFORE, BE IT AND IT IS HEREBY RESOLVED that:

1. The Corporation shall accept requests for transfer of shares into a revocable trust, provided that each of the terms set forth in this resolution have been performed.

2. Any shareholder requesting transfer of his or her shares into a trust must deliver a copy of the first and last (or signature) pages of the Trust, together with a copy of all dispositive provisions of the Trust, to establish that the income of the trust will be paid solely to a shareholder and that, upon the death of the shareholder, the Trust will distribute the shares to the estate of the shareholder, subject to any stock purchase Agreement in effect at that time. Presently, the stock purchase Agreement gives the Corporation the first right to purchase all or part of the shares prior to any distribution to a new shareholder. The Trust shall also contain no provisions which would disqualify the Corporation as a Small Business Corporation under Sub–Chapter S of the Internal Revenue Code.

3. The shareholder shall enter into an agreement in writing with the Corporation to the effect that the shareholder (a) will not alter or change the dispositive provisions of the Trust without the approval of the Corporation and (b) acknowledges that the Corporation shall not transfer on the transfer books of the Corporation the shares held in trust to any person in violation of the stock purchase Agreement then in effect.

Id. The minutes from the meeting also noted that Peter was stepping down as Chairman of the Board of Directors but that he would continue as a member of the board. The minutes were signed by Andrew, as President, and Peter, as Chairman.

In 2001, prior to the annual shareholder meeting,³ Andrew contacted Attorney Daniel Lewis, who was TPO's assistant secretary and had served as TPO's attorney for many years, as well as personal attorney for both Peter and Andrew, about estate planning advice. On March 28, 2001, Andrew formed the Andrew C. Kesling Trust Dated March 28, 2001 (the “Trust”), by executing a Declaration of Revocable Living Trust (the “Trust Declaration”). The Trust Declaration states at the top: “I, ANDREW C. KESLING ... declare that by this instrument I am creating the Andrew C. Kesling Trust. Initially, I shall act as Trustee. By acceptance of this instrument, I and any Successor Trustee agree to administer the trust according to the terms of this instrument.” Exhibit 7 at 1. The Trust Declaration names “Andrew C. Kesling” as grantor as well as trustee during his life, and he signed the document as both grantor and trustee. Id. Section 1.02, which defines “Trustee,” also notes that Andrew's wife, Dorothy R. Kesling, was to act as trustee upon Andrew's death or if he should become incapacitated or resign, and that upon Dorothy's resignation or incapacity, James W. Kaminski was to act as trustee. Id. The Trust Declaration also named a “...