Lank v. Steiner

• Decision Date: 24 October 1966
• Citation: 224 A.2d 242,43 Del.Ch. 262
• Parties: Alena LANK, William D. Lank, Sarah L. Marsh and Anne W. Westphal, Plaintiffs Below, Appellants, v. Edmund F. STEINER, Elsie L. Steiner and the President, Directors and Company of the Farmers Bank of the State of Delaware, a corporation of the State of Delaware, Administrator Cum Testamento Annexo of the Estate of John C. Lank, Deceased, Defendants Below, Appellees. William D. LANK, Administrator of the Estate of Alena Lank, Deceased, Defendant Below, Appellant, v. Edmund F. STEINER and Elsie L. Steiner, his wife, Plaintiffs Below, Appellees.
• Court: Supreme Court of Delaware

Page 242

224 A.2d 242

43 Del.Ch. 262

Alena LANK, William D. Lank, Sarah L. Marsh and Anne W.

Westphal, Plaintiffs Below, Appellants, v. Edmund F. STEINER, Elsie L. Steiner and the President,

Directors and Company of the Farmers Bank of the State of

Delaware, a corporation of the State of Delaware,

Administrator Cum Testamento Annexo of the Estate of John C.

Lank, Deceased, Defendants Below, Appellees.

William D. LANK, Administrator of the Estate of Alena Lank, Deceased, Defendant Below, Appellant, v. Edmund F. STEINER and Elsie L. Steiner, his wife, Plaintiffs

Below, Appellees.

Supreme Court of Delaware.

Oct. 24, 1966.

Petition for Reargument Denied Nov. 10, 1966.

Appeals from Court of Chancery in and for New Castle County.

Aubrey B. Lank and Victor F. Battaglia, of Theisen & Lank, Wilmington, and Houston Wilson, Georgetown, for appellants.

Jackson W. Raysor of Tunnell & Raysor, Georgetown, for appellees.

WOLCOTT, Chief Justice; HERRMANN, Justice, and QUILLEN, Judge, sitting.

WOLCOTT, Chief Justice (for the majority):

This is an appeal from a judgment entered in two cases consolidated for trial. The litigation arises out of a family disagreement among the children of John C. and Alena Lank, both of whom died prior to the institution of the actions. The basic issue is the validity of stock options obtained from the Lanks by Mrs. Steiner, a daughter of the Lanks, and her husband (hereafter 'Steiners'). Contesting the validity of the options are Mrs. Steiner's brother and sisters (hereafter 'Lank heirs') who appeal from the Chancellor's holding of validity.

The following facts were found by the Chancellor:

In 1954 Edmund Steiner, one of the Lanks' sons-in-law, at the request of George Westphal, another son-in-law, was on the lookout for a good business in the Milford area which could be acquired by Westphal upon his imminent retirement from the Army. Ultimately, an oil distributing business was acquired and incorporated as H. R. Phillips Co. The cost of acquisition was $45,000 of which the Steiners supplied $15,000; Westphal supplied $15,000, and the Lanks supplied $15,000. Each family received 150 shares of Phillips stock but the Lanks' shares were divided into 100 shares for Lank and 50 shares for his wife.

Lank was secretary and treasurer of Phillips and all the members of the families at one time or another were either officers or directors. The active management of Phillips, however, was left with Steiner and Westphal, with Westphal as president. The management of Phillips was conducted informally and the business prospered.

In 1959, at the age of 81, Lamk was hospitalized and ultimately lost the use of his right hand. Following his release from the hospital he lived for awhile with the Steiners, but ultimately returned to his home in Milton where he required extensive nursing care.

Some time in 1960 negotiations commenced with two individuals from New Jersey, Foley and Wright, for the sale of Phillips and a related corporation. In late 1960 a fairly firm offer of $300,000 was made and later reduced to $275,000, about $600 per share for the Phillips stock. No contract of sale was entered into, however, because of the demands of a minority stockholder of the related corporation.

Meanwhile, in early 1960, Steiner and Westphal began to have trouble. Lank knew of this. Both Steiner and Westphal appreciated the importance of the Lank shares from the point of view of corporate control and both wanted to buy the Lank shares. In March of 1961 Westphal tried to acquire the Lank stock by offering to trade to Lank some long-term securities owned by him for the Phillips stock. Lank resented this and thought Westphal was trying to take advantage of him. As a result, Lank told Steiner that he desired that Westphal never acquire any of his stock. He then offered to sell it to Steiner. Steiner replied that he could not make the purchase at that time but suggested that Lank give him an option to purchase.

Accordingly, two options, one for 100 shares and one for 50 shares, were executed in 1961 by Mr. and Mrs. Lank, giving the Steiners the right to purchase for a period of ten years the Lank shares at book value, exclusive of good will, with the right to renew the options for an additional five years. While it is not clear who made the suggestion of an option price based on book value, it is clear that when Lank asked what the value of the stock was, Steiner replied that the book value was $270 per share, which was correct.

Following the deaths of the Lanks in 1963, the Steiners tried to exercise the options but were refused delivery of the stock. This litigation followed.

Two contentions are made by the Lank heirs--first, that the options violate a so-called bylaw of Phillips and are thus invalid, and, second, that the Steiners stood in a confidential and fiduciary relationship to the Lanks which they took advantage of unfairly to obtain the options.

The so-called bylaw is in fact a stockholders' resolution to the effect that 'any stockholder wishing to dispose of his interest in the corporation To other than existing stockholders must first offer his stock, at book value to the remaining stockholders.' (Emphasis supplied.)

The Lank heirs say the plain intent of the resolution was to preserve the pro rata stockholdings of the existing stockholders under all conditions. We think to the contrary, however, for the emphasized language clearly indicates that the restriction, whatever its legality, applied only to sales to other than existing stockholders. Since the Steiners were at the time existing stockholders, the restriction had no application to a sale to them.

In support of their second point, the Lank heirs cite Strong v. Repide, 213 U.S. 419, 29 U.S. 521, 53 L.Ed. 853, holding that under special circumstances a director of a corporation acts in a fiduciary capacity when dealing with a stockholder for the purchase of his stock. The special circumstance in the Repide case was that the director did not disclose his knowledge of a pending sale of the corporation and kept his identity as prospective purchaser a secret by dealing with the stockholder through a third party.

In Kors v. Carey, 39 Del.Ch. 47, 158 A.2d 136, a decision which we expressly approve, the Court of Chancery held that the special circumstance rule applies only when a director is possessed of special knowledge of future plans or secret resources and deliberately misleads a stockholder who is ignorant of them.

The Lank heirs argue that knowledge of the Wright and Foley offer of approximately $600 per share was a special circumstance which Steiner should have informed Lank of when he obtained options to purchase at the book value of $270 per share. The Chancellor found, however, that Lank knew of the $600 offer since he, along with all the stockholders, signed a resolution at a stockholders meeting of October 30, 1960, authorizing the sale of corporate assets for a minimum of $270,000, or $600 per share. This resolution was adopted after disclosure to the stockholders of the Wright and foley negotiations. The Chancellor further found that there was no change in circumstances between October, 1960 and the option date in 1961 which would justify the conclusion that Lank was not aware of the difference between the book value and the $600 offer.

The Chancellor found further that Lank's willingness to sell to Steiner at book value was reasonable for the reasons that Steiner had orally agreed not to exercise the options until after Lank's death so that Lank would reap the benefit of any sale in his lifetime, and that he was content to let Steiner have the stock at book value after his death because of his desire that Westphal never get his stock.

Accordingly, the Chancellor concluded that Steiner had breached no duty to Lank as a corporate fiduciary.

The Lank heirs argue, however, that irrespective of their contention that Steiner had breached a fiduciary duty, both he and his wife occupied a position of trust and confidence toward the Lanks, and that they, the Steiners, took advantage of this to obtain the options. This being so, they say a presumption against the validity of the options arises because the Steiners obtained possible benefits at the expense of the Lanks. In an appropriate case, of course, such a presumption undoubtedly exists. Peyton v. William C. Peyton Corporation, 23 Del.Ch. 321, 7 A.2d 737, 123 A.L.R. 1482; Pomeroy, Equity Jurisprudence (5th Ed.) § 956.

However, in order to raise such a presumption the existence of a fiduciary relationship or of trust and confidence between the parties to the transaction must be established as a fact. The party seeking to raise the presumption of invalidity must establish as the fact that the alleged victim reposed trust and confidence in the victimizer and relied on his judgment and advice. 36A C.J.S. Fiduciary p. 385.

The Chancellor found as the fact that there was no such reliance by Lank upon the Steiners. Although Lank depended upon Steiner for information concerning the Phillips Company, and although, by reason of Lank's physical weakness, the Steiners had ingratiated themselves to Lank by doing things for him, the Chancellor found that Lank was a very independent man until his death, particularly with respect to financial matters. He also found that the things or errands the Steiners did for Lank never involved any discretion or decision on their part. They were things which Lank only permitted them to do because at his age he was physically unable to do them.

The Chancellor found the facts to be that a favorable family relationship existed between the Steiners and the Lanks, and that the Lanks 'played favorites' but that the Steiners did not mislead them or consciously exploit this relationship. Under the circumstances, therefore, the Chancellor held that the failure of the Lanks to obtain independent counsel did not call for the application of the presumption of...