Pepka v. Branch

• Decision Date: 29 March 1973
• Docket Number: No. 172A24,172A24
• Citation: 155 Ind.App. 637,294 N.E.2d 141
• Parties: , 65 A.L.R.3d 518 Mary Lou PEPKA, Plaintiff-Petitioner-Appellant, v. Ruth P. BRANCH, Executrix of the Estate of Paul R. Pepka, Deceased, et al., Defendants-Respondents-Appellees.
• Court: Indiana Appellate Court

Page 141

294 N.E.2d 141

155 Ind.App. 637, 65 A.L.R.3d 518

Mary Lou PEPKA, Plaintiff-Petitioner-Appellant, v. Ruth P. BRANCH, Executrix of the Estate of Paul R. Pepka, Deceased, et al., Defendants-Respondents-Appellees.

No. 172A24.

Court of Appeals of Indiana, Second District.

March 29, 1973.

Cook & Cook, Kokomo, for appellant

Raymond H. Zirkle, Bolinger & Zirkle, James R. Butcher, Butcher & Ball, Kokomo, for appellees.

BUCHANAN, Presiding Judge.

CASE SUMMARY

Plaintiff-appellant Mary Lou Pepka (Mary) appeals from a judgment entered against her and in favor of defendant-appellee Ruth P. Branch (Branch), Executrix of the Estate of Paul R. Pepka (Pepka), in an action filed by Mary for the construction of Pepka's Will alleging that a specific bequest was adeemed.

We affirm.

FACTS

The facts and evidence most favorable to Branch and the judgment are:

In 1945 Pepka established a business in Kokomo, Indiana, known as the Pepka Spring Company (the Company), for the purpose of manufacturing coil springs. It was organized as a proprietorship and was owned, operated and controlled 100% by Pepka.

Pepka served as president, general manager, general engineer, and sales manager and normally employed four office-management employees. He determined salaries and assigned all employees to their respective positions. His sister, Branch, acted as office manager, purchasing agent, and had control of the telephone, tax reports, quality control, and personnel. Mary, his wife, was a part-time office employee relieving Branch of many of her duties. A fourth office employee was John V. Pepka (John), Pepka's son, who worked for the Company during the summers and holidays.

On August 19, 1966, Pepka executed a Will which included the following four clauses:

'ITEM III

I am carrying certain bank accounts or savings accounts in the name of 'Paul R. Pepka Reserve Account' which are actually a part of Pepka Spring Company and they are to become assets of the Pepka Spring Company in case of my death.

'ITEM IV

All of the real estate which I presently own is actually a part of the Pepka Spring Company and is to become a part of the Pepka Spring Company in the event of my death and all property which is carried on my books and records, such as cars and real property, as expenses of the Pepka Spring Company is to become and remain a part of the Pepka Spring Company.

'ITEM V

I will, devise, and bequeath to my son, John Vincent Pepka, sixty-five percent (65%) of the Pepka Spring Company, twenty-five percent (25%) to Mary Lou Pepka, and ten percent (10%) to Ruth Mary Branch.

(Hereafter the Speicfic Bequest.)

'ITEM VI

I hereby give, will, devise, and bequeath to my beloved wife, Mary Lou Pepka, all the rest and residue of my estate, whether it be real, personal, or mixed, and wherever situated.'

(Hereafter the Residuary Clause.)

(Emphasis supplied.)

On December 28, 1966, about five weeks after executing his Will, Pepka caused the Company to be incorporated under Indiana law and the name of the Company became Pepka Spring Company, Inc. (also referred to herein as the Company). This action was taken on the advice of Pepka's tax accountant and after consultation with his brother, Burwell Pepka, who had incorporated a similar business owned by him in Washington. Both of these gentlemen testified that Pepka incorporated the Company for tax savings and to insure that his business would continue after his death.

On the advice of the tax accountant, Pepka retained in his own name certain assets of the business wich had previously been a part of the Company. These assets included the real estate (which was then leased to the Company), the accounts receivable, the goodwill of the business, and two reserve savings accounts, one in the Union Bank in the amount of Eighty-six Dollars and Sixty-seven Cents ($86.67) and a second in First Federal Savings & Loan Association of Kokomo in the amount of Seven Hundred Thirty-four Dollars and Ninety-two Cents ($734.92). (Also held out were the accounts payable.) The tax accountant testified these assets were left out of the corporation so that Pepka would not lose everything if the Company should become insolvent. Further, it was his advice that it would be easier to add assets to the new corporation than it would be to withdraw them.

The assets contributed by Pepka to the corporation included One Hundred Sixty-five Dollars and Forty-eight Cents ($165.48) cash, Five Thousand Two Hundred Twenty-five Dollars and Thirty Cents ($5,225.30) inventory, and depreciable assets amounting to Sixteen Thousand Six Hundred Thirty-nine Dollars and Forty-two Cents ($16,639.42). They represented the only payment for stock in the new corporation, all of which was owned entirely by him, but never issued. As of November 1, 1968, less than two months prior to Pepka's death, the assets of the new corporation were Fifty-seven Thousand Eight Hundred Eighty Dollars and Eighty Cents ($57,880.80).

Uncontested evidence disclosed that after incorporation the business continued to be operated by Pepka at the same location with little change. Pepka took a salary as President and Six Hundred Dollars ($600.00) per month rental for the use of the real estate. Otherwise he continued to make all management decisions and run the business as in the past. Even though officers were nominally elected (the same personnel with the same duties as before), Pepka as President dominated the business as in the past. No change in function of the business occurred and Pepka set all salaries, determined lease rental on the real estate, and loaned himself Forty-five Hundred Dollars ($4,500.00).

Pepka expired December 26, 1968--about two years after incorporating the business and two and one-half years after executing his Will. After opening an estate, Branch, as Executrix, on February 25, 1969 filed an Inventory in Pepka's estate, which included nine hundred ninety-seven shares of stock owned by Pepka in Pepka Spring Company, Inc. Of the one thousand shares authorized, the other three shares were owned one each by Mary, John, and Branch--for which they made no payment.

A special meeting of the board of directors was then held on March 4, 1969, with John, Mary, Branch, and others present, at which time officers of the corporation were elected, to-wit: John, president; Mary, vice president; and Branch, treasurer and secretary.

On May 22, 1969, Mary, being sole residuary legatee and devisee under the Residuary Clause, filed a Petition for construction of her deceased husband's Will, alleging that the gift to his son John, Branch, and herself under the terms of the Specific Bequest (Item V) of the Company failed, and therefore passed to her exclusively under the Residuary Clause (Item VI).

At the conclusion of the trial on February 12, 1970, the court ordered the parties to submit Proposed Findings of Fact and Conclusions of Law. Later, on December 7, 1970, the court adopted John's Findings of Fact and Conclusions of Law ¹ and entered For reasons which will more fully hereinafter appear, attention is particularly directed to Conclusions of Law No. 10 and No. 13, which are set out in Footnote one.

judgment that the Specific Bequest of [155 Ind.App. 649] the Company was not adeemed. Mary filed her Motion to Correct Errors, which was subsequently overruled, and this appeal followed.

ISSUES

ISSUE ONE. Did the incorporation of the business described in the Specific Bequest as the 'Pepka Spring Company' so substantially change it as to effect an ademption, thereby causing Pepka's interest in the corporation to pass to Mary exclusively under the Residuary Clause?

ISSUE TWO. Were John and Branch, by their conduct, estopped to deny the existence of a corporation?

ISSUE THREE. Did the court commit reversible error by permitting Branch to testify as to Pepka's explanation of his reasons for incorporating the Company?

ISSUE FOUR. Were the court's Findings of Fact and Conclusions of Law so erroneous, incomplete, inconsistent, or otherwise defective as to constitute reversible error?

As to ISSUE ONE, Mary argues that the Specific Bequest bequeaths only Pepka's interest in the 'Pepka Spring Company' and is silent as to 'Pepka Spring Company, Inc.' As the business operated by Pepka as a sole proprietor was incorporated and no longer exists, the Specific Bequest of the Company has been adeemed and Pepka's corporate interest therefore passes to Mary exclusively under the Residuary Clause.

John and Branch maintain the incorporation of the business was merely a change in form and not substance as the new corporation was in almost all respects owned, operated, and controlled by the same person in the same manner as before. Further, the incorporation was carried out for tax purposes only, a mere formality.

As to ISSUE TWO, Mary asserts John and Branch are estopped to deny the existence of the corporation in their interpretation of the Specific Bequest because in anticipation of receiving the corporation's shares they voted themselves into control of the corporation.

In reply, John and Branch say Mary's estoppel argument is irrelevant for the reason As to ISSUE THREE, Mary's position is, as we fathom it, that Branch should not have been permitted to testify as to Pepka's explanation of his reasons for incorporating the Company, because such testimony was in violation of the rule that declarations of a testator, whether made before, contemporaneously with, or subsequent to the making of the will, cannot be received to affect its construction when the intent of the testator can be discerned from the four corners of the will.

that they specifically admit and recognize the existence of the corporation and are, in fact, relying upon it.

Their reply is that a will should be construed to give effect to the intentions of the testator and Branch's answer accomplished that purpose.

As to ISSUE FOUR, Mary attacks the trial court's Findings of Fact and Conclusions of Law in...