Kathryn S. Watts v. Francis X. Smith, Sr. ( 2023 )

RENDERED: SEPTEMBER 8, 2023; 10:00 A.M.
NOT TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2022-CA-1172-MR
KATHRYN S. WATTS; JEREMY
JANES; MARY VIRGINIA CAREY;
AND PATRICIA F. SMITH APPELLANTS
APPEAL FROM NELSON CIRCUIT COURT
v. HONORABLE KELLY MARK EASTON, SPECIAL JUDGE
ACTION NO. 21-CI-00505
FRANCIS X. SMITH, SR. AND
THOMAS STOCKER SMITH,
TRUSTEE OF THE THOMAS
STOCKER SMITH DECLARATION
OF TRUST U/A DATED 1/5/2018 APPELLEES
OPINION
AFFIRMING
** ** ** ** **
BEFORE: COMBS, DIXON, AND ECKERLE, JUDGES.
COMBS, JUDGE: This appeal arises from an action for a declaratory judgment.
The trial court determined that a 1972 Stock Restriction Agreement is a valid and
binding agreement governing the process of the sale of shares of Smith Brothers
Distributing Company. After our review, we affirm.
Smith Brothers Distributing Company is a beer distributorship which
was incorporated in 1971 under the laws of Kentucky. The trial court’s
Declaratory Judgment provides a summary of the underlying facts:
Beginning in the 1940’s, B.L. [Bertram L.] Smith
and his wife Sylvia built a successful business related to
the distribution of alcohol. After thirty years, B.L. and
Sylvia decided to turn this enterprise over to the next
generation, their eight children: Rapier [Charles R.
Smith, Sr.], Bert, Francis [Francis X. Smith], Willie, Tom
[Thomas S. Smith], Mary, Pat, and Ginny. One of the
business entities they created is Smith Brothers
Distributing Company (“SBDC”).
As the initial president and vice-president of
SBDC, B.L. and Sylvia crafted the [1972] Stock
Restriction Agreement (“SRA”) which is the primary
subject of this case. SBDC started with 208 shares of
stock. The Smiths’ children each received a gift of 26
shares. Over the years since, these shares have remained
with SBDC or in the extended Smith family. Presently,
there are four owners, individually or by group.[1] Each
has a 25% interest in SBDC, each having 26 of the
remaining 104 shares.
One of the share blocks of 25% will be referred to
as the Rapier block. Rapier’s 25% interest passed
through a gift trust to his seven children: Sylvia, Kat[y],
Ginny, Chuck, Frank, Margie, and Amy. At least to
some extent, there has been a falling out among the
Rapier block shareholders. They appear to be aligned in
a 4-3 split. The present controversy arose when Margie
let it be known she was considering selling her shares.
1
The four owners are: Francis X. Smith; Thomas S. Smith; Patricia F. Smith (Patsy), widow of
Willie Smith; and the Rapier Smith Shareholders.
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In relevant part, the 1972 agreement (SRA) sets forth its purpose as
follows:
. . . the Stockholders desire to promote, protect and
preserve their mutual interests and the interests of the
Corporation by assuring continuity of stock ownership
and corporate control, and by imposing certain
restrictions and obligations on themselves, the
Corporation, and the share of stock of the Corporation.
Paragraph 1 of the 1972 SRA provides that “[a]ny stockholder may
transfer all or a part of his stock of the Corporation by gift” to or for the benefit of
an immediate family member “without the written consent of all other
stockholders.”
As summarized by the trial court:
If the shareholder does not want to give the stock
away to or for the benefit of a family member, the SRA
establishes a step-by-step process. First Paragraph 2
directs the shareholder to give forty days’ notice to the
corporation and all shareholders of the intent to sell the
stock. A meeting must be conducted within the same
forty days. At that meeting, the SBDC can purchase or
retire the stock offered.
If any stock is left after SBDC makes its decision,
then the other shareholders may purchase the stock in
proportionate shares, which is a clearly defined term in
Paragraph 3. After that part of the process, B.L. and
Sylvia reserved to themselves an option to purchase the
shares in Paragraph 4. That provision is moot now, since
both have passed away. If the stock is not retired or
purchased through Paragraphs 2 and 3, the stockholder
then has complete freedom to sell as they wish under
Paragraph 5.
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Paragraph 6 is particularly telling when
assessing the overall intent of the SRA. If the
stockholder with the complete freedom to do so does not
sell the stock to another, the shareholder may ask the
corporation to buy the shares. If the shareholder chooses
this option, then the corporation must buy back the stock.
If the corporation does not then buy the stock back, the
corporation dissolves. This destruction provision is
part of the clear theme of the SRA for the stock to
stay in the family whether held by the corporation of
[sic] the family members who hold the stock.
(Bold-face emphases added.)
Paragraph 7 of the SRA is central to the issue on appeal and provides
as follows in relevant part:
(a) The purchase price for any stock of the
Corporation, purchased under the terms of this
Agreement by the Corporation, or by the Stockholders, or
by Bertram L. Smith, Sr., or Sylvia R. Smith, shall be
$100.00 per each share of the Corporation outstanding
common stock adjusted for stock dividends and stock
split after the date of this Agreement and until the first
Monday in July, 1975, when a new value will be
determined if all shareholders of the Corporation’s
outstanding stock agree thereto. If the shareholders do
not agree th[e]n the Stock Restriction Agreement
terminates in accordance with Paragraph 13 hereof.
Paragraph 13 provides that:
This Agreement shall become effective as of the
date hereof and shall continue in full force and effect
until terminated by the mutual agreement of all of the
parties hereto, or by voluntary or involuntary dissolution
of the Corporation, or upon adjudication of the
Corporation as a bankrupt, whichever event occurs first.
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The original stockholders did not exercise their option to set a new
stock value after the three-year term expired in July 1975.
On October 28, 2021, SBDC filed a petition in Nelson Circuit Court
seeking a declaratory judgment regarding the transferability and ownership of
shares of SBDC stock and a resolution of issues regarding the 1972 SRA with
respect to the Respondents/Shareholders.
On November 22, 2021, Kathryn S. Watts (Katy) and Patricia F.
Smith (Patsy) in their capacity as directors of SBDC, filed a motion to dismiss on
grounds that the petition -- which they opposed -- was not authorized by a majority
of the company’s four directors: Katy, Patsy, Francis, and Tom.
On December 10, 2021, Francis and Tom filed an answer and a cross-
claim for declaration of rights, asserting that the 1972 SRA is a valid and binding
agreement that governs the transfer of shares of the company and applies to the
signatories and all subsequent transferees. Furthermore, they take issue with the
argument of the Respondents as to their claim that a December 21, 2016
Shareholders’ Agreement “abrogates, modifies, or takes precedence over the 1972
Stock Restriction Agreement.”
By Order entered on March 14, 2022, the trial court granted the
motion to dismiss and ordered that “this case will continue on the Cross-Petition
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for the same declaration of rights. The questions then to be addressed are the
validity and application of the two agreements.”
On June 2-3, 2022, the trial court conducted an evidentiary hearing,
and the matter was submitted on post-hearing briefs. The Cross-Claim Petitioners,
Francis and Tom, argued that: 1) the 1972 SRA remains in full force and effect
and has not terminated by its own terms because none of the events listed in
Paragraph 13 has occurred; 2) that it is undisputed that every SBDC stock
certificate issued since approximately 1972 bears an imprinted endorsement that
the stock is subject to the 1972 SRA transfer restrictions,2 thus binding the Cross-
Claim Respondents by its terms; 3) that waiver and estoppel operate as a bar to
Respondents’ claims because their conduct constitutes acquiescence; and 4) that
the 2016 Agreement is void as an improper amendment to an irrevocable trust and
that it cannot abrogate or modify the 1972 SRA.
2
Paragraph 11 of the 1972 SRA provides that:
Upon the execution of this Agreement, the Certificates of
stock held by each of the stockholders to this Agreement shall have
conspicuously endorsed or imprinted on stock certificates held by
them the following statement:
“The shares of stock of SMITH BROTHERS
DISTRIBUTING COMPANY, represented by this
certificate are restricted as to transfer and sale according to
Stock Restriction Agreement made and entered into the 8th
day of January, 1972, and approved at the first meeting of
the stockholders on said date, to which [] reference is made
as to the restriction on the transfer of this stock.”
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In their post-hearing brief, the Cross-Claim Respondents requested
that the trial court dismiss the Cross-Claim and rule that the 1972 SRA is
unenforceable. Specifically, they argued: 1) that Rapier never signed the 1972
SRA; 2) that even if the 1972 SRA had been valid when executed, it terminated by
its own terms in 1975 pursuant to Paragraph 7; 3) that even if the 1972 SRA was
enforceable beyond 1975, the shareholders abandoned it by acting inconsistently
with its terms; 4) that even if the 1972 SRA is still in effect, the lack of a pricing
term renders it unenforceable; and 5) that should the court determine that the 1972
SRA remains in full force, its terms do not prohibit execution of the 2016
Agreement among the Rapier Smith shareholders.
On August 29, 2022, the trial court entered a Declaratory Judgment in
relevant part as follows:
Before addressing the legal issues presented, the
Court notes equitable arguments asserted. . . . First
“equity follows the law.” In other words, if the rights
of the parties are governed by legal principles, such as
the law relating to contract interpretation, then equity
should not be applied routinely to change the rights of
the parties. Morton v. Bank of the Bluegrass and Trust
Co., 18 S.W.3d 353 (Ky. App. 1999) (Footnote 4).
Parties have also suggested the “unclean hands”
doctrine to prevent the application of equitable relief.
This rule is not an absolute bar to relief and often
requires a comparison of the parties’ conduct. Suter v.
Mazyck, 226 S.W.3d 837, 843 (Ky. 2007). In this case,
both sides list complaints against the other leaving real
doubt about the cleanliness of hands all around.
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The equitable principle most applicable is . . .
“equity aids the vigilant, not those who slumber on their
rights.” Williams Coal and Coke Co. v. Spears, 125
S.W.2d 745, 748 (Ky. 1938). Some complaints about
past transactions fit within this concept as will be
explained hereafter. Ultimately, the Court has applied
the law and concludes the law provides a correct and
equitable answer.
(Bold-face emphases added.)
Next, the trial court addressed the challenge to the authenticity of
Rapier’s signature on the 1972 SRA. The court explained that opinion testimony is
allowed from witnesses familiar with an individual’s handwriting, citing KRE3
901(b)(2), KRE 701. However, the court was not persuaded by the testimony of
Rapier’s daughters that the signature did not appear to be that of their father -- nor
by Francis’s opinion to the contrary -- given that “[e]ach of the witnesses has a
substantial financial interest which may influence their opinions.” Rather, the trial
court based its determination that the signature on the SRA was Rapier’s after
having compared it to his undisputed signature on other exhibits and upon other
circumstantial evidence. Rapier’s signature was not disputed for 50 years, and
Tom testified that B.L. would not have allowed stock to be issued to any of the
children unless he was satisfied they had signed the SRA. The trial court also
noted that the SRA is mentioned on every stock certificate and that if Rapier’s
3
Kentucky Rules of Evidence.
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signature had been forged, it would be “implausible” to believe that he would not
have been aware of it. The trial court found that:
Rapier signed the SRA. As a result, it was a
unanimous agreement among all stockholders.
Unanimity is an important theme in the SRA. B.L.
also clearly designed the SRA to keep SBDC “in the
family.” Before analyzing the SRA further, the Court
should address the long shadow cast by an important
business partner which is not a party to this suit.
One estimate suggests 90% of SBDC’s business is
with Anheuser-Busch (“A-B”). Contracts between
SBDC and A-B have heavily influenced decisions by
SBDC and its shareholders over the years. . . .
. . . Regardless of the impact of the agreements
with A-B, those agreements are not in dispute here. The
Court need not lose focus with detailed analysis of those
agreements.
...
With these distractions aside, the Court must
analyze the SRA as a contract. At the outset, the Court
will not engage in the semantic battle about the SRA
being a buy-sell agreement. It is. As we will see, this
nomenclature is not controlling for the SRA’s legal
impact.
. . . Under contract law, the law looks for the
intent of the parties as they stated it. Every word
should be considered. The Court should not add or
subtract words. The Court must look at every provision
in context with the entire agreement being considered
together. See e.g., City of Louisa v. Newland, 705
S.W.2d 916 (Ky. 1986).
...
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The main contention of the Rapier block is the
price provision in Paragraph 7. An initial value was set
with an option to reset that price in 1975[4] “if all
shareholders . . . agree thereto.” The choice of the verb
“will” versus the mandatory “shall” is significant. That
never happened, although it should have. If no price was
agreed upon, the SRA “terminates in accordance with
Paragraph 13 hereof.”
This creates an arguable ambiguity for the SRA.
The Rapier block argues without a price being set in
1975, the SRA must terminate. They contend the use of
the word “accordance” does not revive the SRA under
Paragraph 13 after the price failure under Paragraph 7.
Paragraph 13 does not mention Paragraph 7 or
any price provision. It permits termination only in
case of unanimous agreement, dissolution, or
bankruptcy. It is curious a termination was not
directed by Paragraph 7 itself. It that was the intent,
it could have been simply and clearly stated there.
The use of the word “accordance” is significant.
When a contract does not provide a definition within it,
we look for the usual meaning of a word with recognition
of the legal context of a contract. References to
dictionaries may be appropriate. See Hensley v. Gadd,
560 S.W.3d 516 (Ky. 2018).
Black’s Law Dictionary (5th Ed.) defines
accordance as “agreement, harmony, concord,
conformity.” Applying this definition to the reference in
Paragraph 7 to Paragraph 13, the Court concludes the
intent of the SRA was not to terminate the SRA if a
price was not set in 1975. The parties could set a price
at any time when and if a sale was to be considered.
4
“[W]hen a new value will be determined . . . .” This is the language referenced from paragraph
7 utilizing “will” instead of the mandatory “shall.”
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The Rapier block argument proceeds from an
assumption that any buy sell agreement must fix a price.
There is not just one type of buy sell agreement. The
SRA is about process more than price. Regardless of a
set price, the SRA still requires a process for offering
stock outside of a family gift. The Rapier block has a
point with the absence of a price term being simply an
unenforceable “agreement to agree,” but when we look
at the required process of the SRA, the price term
does not control.
The Court will illustrate this with an example of
how an offer would apply in the context of the SRA and
the 2016 Agreement of the Rapier block. To do this, the
Court must assume (but not decide) the manner in
which the 2016 agreement was imposed upon the
current Rapier block shareholders is valid. The
trustees of Rapier’s gift trust imposed the 2016
agreement with apparently no input from some of the
individual shareholders. This may be the subject of a
further suit, but it is not necessary to decide with
respect to the primacy of the SRA.
Against this understanding of the SRA process, it
becomes clear the 2016 Agreement for the Rapier
block is invalid to the extent it is in conflict with the
SRA. Only if a shareholder gets through Paragraphs 2
and 3 of the SRA could the later Rapier block 2016
agreement restrictions apply. It could then otherwise
limit the absolute freedom the SRA provides in
Paragraph 5.
Margie tested this process. She and her counsel
have made clear they never intended an actual offer to
sell. Even so, it was treated as such with an attempt at
the SRA process. Perhaps fortunately, this process was
not consummated. Margie is still bound by all the
provisions of the SRA.
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The fact this was not an actual offer does not
lessen the need for a declaration of rights for these parties
with respect to the conflicting agreements. . . .
(Underline original, bold-face emphases added.)
The trial court then provided a detailed example of how it would work
if a member of the “badly divided Rapier block” decided to sell his or her shares
under the terms of the SRA. The court concluded that: “[i]n summary, the SRA is
a valid and binding agreement which governs the process of the sale of SBDC
shares. The 2016 agreement among the Rapier block shareholders only applies
after compliance with the process of paragraphs 2 and 3 of the SRA.” (Bold-face
emphasis added.)
On September 29, 2022, Kathryn S. Watts, Patricia F. Smith, Jeremy
Janes, and Mary Virginia Carey (collectively Appellants), filed a Notice of Appeal
to this Court.
This court reviews the decision of a circuit court in
a declaratory judgment action under the clearly erroneous
standard set forth in CR[5] 52.01. Under CR 52.01, the
circuit court’s findings of fact shall not be set aside
unless clearly erroneous and due regard shall be given to
the opportunity of the circuit court to assess the
credibility of the witnesses.
Reynolds Enterprises, Inc. v. Kentucky Bd. of Embalmers and Funeral Directors,
382 S.W.3d 47, 49 (Ky. App. 2012) (citation omitted).
5
Kentucky Rules of Civil Procedure.
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First, Appellants argue that the trial court erred in finding that Rapier
signed the 1972 SRA. They contend that Appellees failed to sufficiently rebut the
testimony of Rapier’s daughters, who did not believe that the signature was their
father’s. The trial court did not find this testimony dispositive because “[e]ach of
the witnesses has a substantial financial interest which may influence their
opinions.” Credibility determinations and the weight to be given to the evidence
lie “within the province of the trial court as the fact-finder[.]” God’s Center
Foundation, Inc. v. Lexington Fayette Urban Cnty. Government, 125 S.W.3d 295,
300 (Ky. App. 2002). Even uncontradicted, the testimony of an interested witness
does not bind the factfinder. Grider Hill Dock, Inc. v. Sloan, 448 S.W.2d 373 (Ky.
1969). Thus, we find no error on this issue.
Next, Appellants argue that the trial court misapplied contract
interpretation principles in finding that the 1972 SRA did not expire in July 1975.
The primary object in construing a contract . . . is to
effectuate the intentions of the parties. Any contract or
agreement must be construed as a whole, giving effect to
all parts and every word in it if possible.
Where a contract is ambiguous or silent on a vital
matter, a court may consider parol and extrinsic evidence
involving the circumstances surrounding execution of the
contract, the subject matter of the contract, the objects to
be accomplished, and the conduct of the parties. Absent
an ambiguity in the contract, the parties’ intentions must
be discerned from the four corners of the instrument
without resort to extrinsic evidence. . . . Generally, the
interpretation of a contract, including determining
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whether a contract is ambiguous, is a question of law for
the courts and is subject to de novo review.
Cantrell Supply, Inc. v. Liberty Mut. Ins. Co., 94 S.W.3d 381, 384-85 (Ky. App.
2002) (internal quotation marks and citations omitted).
Appellants argue that the trial court erred in finding that the language
in Paragraph 7 (i.e., that if no price was agreed upon, the SRA terminates in
accordance with Paragraph 13) “creates an arguable ambiguity for the SRA.”
Appellants contend that these provisions are not ambiguous. We agree. They are
not. However, we do not agree with Appellants that the trial court misapplied
principles of contract interpretation or that it reached an incorrect result in the case
before us.
Although the trial court commented that the language created an
arguable ambiguity, the trial court did not make a determination that the SRA was
in fact ambiguous. The trial court was merely treating the issue of an alleged
ambiguity as the subject of its own thought process, analysis, and ruminations. We
agree with Appellees that “[t]he trial court applied the plain meaning of the terms
in the SRA within the four corners of the document and did not look to extrinsic
evidence to interpret or construe the procedure set forth within.” It so concluded
after weighing all “arguable” aspects of the allegation of ambiguity.
To recapitulate, the language of Paragraph 7 did not require or
mandate that the shareholders establish a new value by the first Monday in July
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1975. And as the trial court observed, “a termination was not directed by
Paragraph 7 itself.” Instead, Paragraph 7 provides that the SRA would terminate in
accordance with Paragraph 13.
Paragraph 13 provides that the SRA “shall continue in full force and
effect until terminated by [1] the mutual agreement of all of the parties hereto, or
[2] by voluntary or involuntary dissolution of the Corporation, or [3] upon
adjudication of the Corporation as a bankrupt, whichever event occurs first.” We
agree with Appellees that none of those events has occurred. Accordingly, we
conclude that the SRA has remained in full force and effect.
Third, Appellants argue that the trial court erred in finding that the
1972 SRA remains enforceable despite lack of a material price term. A “basic
principle of contract law . . . requires substantial certainty as to the material terms
upon which the minds of the parties have met . . . .” Walker v. Keith, 382 S.W.2d
198, 204-05 (Ky. 1964). “[A]n agreement to agree cannot constitute a binding
contract.” Id. at 201. “However, a contract need only be definite and certain as to
those terms that are ‘material and essential’ to the parties’ agreement.” Fischer v.
CTMI, L.L.C., 479 S.W.3d 231, 237 (Tex. 2016) (citations omitted).
In the case before us, the trial court did not consider price to be a
material term. As the trial court observed, Appellants’ argument “proceeds from
an assumption that any buy sell agreement must fix a price.” “The mistake in that
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argument is fundamental. Terms that are material to one kind of contract are not
necessarily material to another kind of contract.” Dalton v. Robert Jahn Corp.,
146 P.3d 399, 412 (Or. App. 2006). The trial court explained that there is more
than one type of buy-sell agreement; that the 1972 SRA is more about process than
price; and that “when we look at the required process of the SRA, the price term
does not control.” (Underline original.) We agree with the trial court’s analysis.
The trial court correctly determined that the “SRA is a valid and binding agreement
which governs the process of the sale of SBDC shares.” (Emphasis added.)
Appellants’ fourth argument is that the trial court erred in finding that
the 1972 SRA was not abandoned, a conclusion that is implicit in the court’s
determination that the SRA is a valid and binding agreement. In essence,
Appellants re-argue their case. Under Kentucky law, “[a] contract may be
abandoned expressly or implicitly by the parties acting inconsistently with its
terms.” L.K. Comstock & Co., Inc. v. Becon Constr. Co., Inc., 932 F. Supp. 906,
931 (E.D. Ky. 1993). And “the proof must be clear and convincing to sustain a
finding that the contract has been abandoned.” Id. at 933. The parties point to
conflicting evidence on this issue. The trial court noted that the SRA is mentioned
on every stock certificate. It found that in 1985, Tom recognized the applicability
of the SRA in communication with SBDC and that Mary sold her stock consistent
with the options of the SRA. The trial court concluded that subsequent transfers
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were accomplished consistent with the SRA -- even if it were not explicitly
mentioned. The trial court’s findings are supported by substantial evidence. Thus,
there is no basis for reversal. CR 52.01.
Appellants’ last two arguments involve equitable considerations.
Appellants argue that the trial court erred in rejecting their argument that Appellees
should be precluded from relying on equitable principles because they have
unclean hands. As Appellees note, Appellants fail to point out in the Declaratory
Judgment where the trial court committed this alleged error. Appellants also argue
that the trial court erred in finding that they “slumbered on” or were not vigilant in
pursuing their rights -- or that they otherwise acquiesced to the 1972 SRA. It
appears that Appellants may have misperceived the basis of the trial court’s
decision. As set forth above, the trial court clearly acknowledged the parties’
equitable arguments. However, it clearly articulated that equity follows the law,
ultimately resolving the issues before it on legal grounds. We find no error.
We affirm the Declaratory Judgment of the Nelson Circuit Court.
ALL CONCUR.
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BRIEFS FOR APPELLANTS: BRIEF FOR APPELLEES:
John S. Lueken Jay E. Ingle
Benjamin J. Lewis John W. Hays
Chelsea Granville Reed Lexington, Kentucky
Louisville, Kentucky
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