Title: Card v. Stirnweis
Citation: 232 Or. 123, 374 P.2d 472
Docket Number: N/A
State: Oregon
Issuer: Oregon Supreme Court
Date: September 19, 1962

Affirmed September 19, 1962.
Wilber Henderson, Portland, argued the cause for appellant. With him on the brief was Barrett Randall, Portland.
*124 James H. Clarke, Portland, argued the cause for respondent. On the brief were Koerner, Young, McColloch &amp; Dezendorf, Portland.
Before McALLISTER, Chief Justice, and ROSSMAN, PERRY and GOODWIN, Justices.
AFFIRMED.
ROSSMAN, J.
This is an appeal by the plaintiff, Don B. Card, from a decree of the circuit court which dismissed this suit. Card, claiming that he had accepted an option signed October 28, 1946, by one V.O. Stirnweis, brought this suit to secure specific performance of the option. The latter authorized Card to purchase at the time of the death of Stirnweis all of the stock which he owned October 28, 1946, in a corporation entitled Crawford &amp; Doherty Foundry Co. On the day just mentioned Stirnweis owned substantially more than one-half of the shares of the stock of that corporation. Stirnweis and Card were the only owners of the shares of stock of the corporation on October 28, 1946. The two men were also at that time the sole officers of the corporation. At that time the relationship between the two was cordial; it manifested mutual trust and confidence. October 28, 1946, when Stirnweis granted to Card the option to purchase all of Stirnweis' stock, Card issued a similar option to Stirnweis. Each option specified the purchase price to be paid by the optionee and each stated, "This option to take effect only in the event of my death." Each option stated that it could be "revoked by giving written notice" to the optionee. By May 20, 1954, the cordial relationship which had existed between the two men had come to a close. On that day, according to the plaintiff-appellant's brief, "Plaintiff, at the request *125 of V.O. Stirnweis, tendered his resignation which was accepted, and thereafter the parties had no dealings." The resignation to which the quoted words refer was from Card's offices in the corporation as an officer and a director. Later the plaintiff sold all of his shares of stock to Stirnweis. Still later, that is, on July 22, 1960, Stirnweis died. The defendant is his widow and the executrix of his estate. Following her appointment as executrix the plaintiff notified her that he elected to exercise the option. He tendered the needed amount of money and demanded delivery to him of all stock standing in the name of her husband when the option was signed. The defendant rejected the demand. As we have stated, the circuit court sustained the defendant's position.
The plaintiff-appellant's assignment of error follows:
When the plaintiff resigned from his offices in the corporation he did not sell his stock. When the options were issued the plaintiff was the beneficiary in a policy of life insurance which was issued upon the life of Stirnweis. A similar policy in favor of Stirnweis existed upon Card's life. Each option, in specifying the initial payment which the optionee was required to make upon exercising it, said "plus any amount in excess of ten thousand available by reason of insurance upon the life of * * *." That provision renders reasonable the inference that the purpose of the life insurance was to help the optionee *126 finance the exercise of the option. By May 20, 1954, when Card resigned his corporate offices, the life insurance policies had expired. April 20, 1960, Card sold all of his stock to Stirnweis and thereafter owned none.
Referring to the two options, the plaintiff testified:
We have mentioned the facts that (1) Stirnweis owned more than one-half of the stock of the corporation and (2) the option which he signed covered all stock "now standing in my name on the books" of the corporation.
The material part of the option executed by the deceased reads as follows:
Stirnweis accompanied his signature with a seal. Card did the same when he signed his option. A seal "is primary evidence of a consideration," ORS 42.130.
The defendant contends that eligibility to exercise the option was subject to an implied condition that its holder be a shareholder in the corporation at the time of its exercise. She also urges that since the plaintiff divested himself of all of his stock prior to the death of the deceased, and owned no stock in the corporation thereafter, the option was effectively terminated.
To support his assignment of error, which we have quoted, the plaintiff claims that there is no implied condition such as that for which the defendant contends and that it was error for the trial judge to consider the circumstances surrounding the execution of the contract in finding such a condition. The plaintiff contends that a court may not consider the situation of the parties to an instrument, or the circumstances under which the latter was made unless the instrument is ambiguous on its face. He claims that the document in question is unambiguous.
Since the plaintiff bases virtually his entire argument *128 on this contention, it becomes necessary to consider the following sections of our laws:
ORS 41.740 establishes for this state our parol evidence rule; it says:
We interrupt the quotation for the purpose of taking notice particularly of the following sentence of the section:
ORS 42.220, referred to in the above quoted section, reads:
The application of the section of our laws just quoted to the practical affairs of life is well illustrated *129 by Baker County v. Huntington, 46 Or 275, 79 P 187 (1905), as follows:
The principles stated in the decision of which we have just taken notice are in harmony with the law employed in other jurisdictions. Restatement of the Law, Contracts, § 230, says:
Section 235 of the same volume states:
Corbin on Contracts, § 579, states:
The principle of the Baker case has never been renounced. Barnstable v. United States National Bank, *131 232 Or 36, 374 P2d 386, decided September 5, 1962, does not conflict with the holding just quoted. It dealt with a contract partly written and partly oral. The latter was supplementary to the written part and did not impinge upon it.
The purpose of ORS 41.740 and 42.220 in placing the judge in the position of the parties whose writing he is endeavoring to understand is like the act of a person who, upon seeing another studying a photograph of an individual from which the background has been cut away, hands to the person the background part so that he may restore the mutilated photograph and see the picture as it was when the camera was snapped.
The restoration of the background to the mutilated photograph does not alter or change a single line or part of the photograph, but it may enable the one viewing the photograph to discern more clearly what is represented by it.
In the case at bar the circumstances that surround the execution of the two option agreements, as viewed in the light of Baker County v. Huntington, supra, were: the plaintiff and the deceased were the only shareholders of the corporation, they were the only officers, they anticipated a continuance of the pleasant relationship between them that then prevailed, and in issuing the options their purpose was, so the plaintiff testified, to afford the survivor protection in his ownership of stock.
When we consider the options in the light of the surrounding circumstances, we have the situation to which we will now proceed.
At the time the option was executed the deceased was the majority shareholder in the Crawford &amp; Doherty Foundry Company. The plaintiff held all of *132 the remaining shares. Both were active in the business, serving as executives. It is typical of close corporations that the shareholders are in intimate contact with one another. Each becomes aware of the business ability of the other, and the ability of each is vital to the successful operation of the corporation. See 1 O'Neal, Close Corporations, p 13, Sec. 1.07. So in this company both the plaintiff and the deceased played important roles in the conduct of its affairs.
It is understandable that persons engaged in an operation such as the plaintiff and the deceased conducted would wish to retain power to determine who should become owner of the stock of his associate upon his death. The option which each of these two men gave to the other would enable the survivor with the help of the insurance money and the deferred payment plan for which the options made provision, to acquire the deceased's stock if the survivor felt that the deceased's widow, heirs, or legatees would not be suitable future associates. Naturally, a surviving stockholder wishes to prevent the entry into the business of persons whose business judgment he mistrusts, or with whom he believes he could not work harmoniously. Possibly he may desire to guard against the sale by an heir or devisee of shares to competitors or others unfriendly to the corporation and whose aim would be to destroy rather than to build. Mason v. Mallard, 213 Iowa 1076, 240 NW 671 (1932); Casper v. Kalt-Zimmers Mfg. Co., 159 Wis 517, 149 NW 754, 150 NW 1101 (1914); Model Clothing House v. Dickinson, 146 Minn 367, 178 NW 957 (1920). Apparently Holmes, C.J., was thinking of those factors when he stated in Barrett v. King, 181 Mass 476, 63 NE 934 (1902), that:
The options which Card and the deceased signed afforded the optionee, upon becoming the survivor, opportunity to prevent any stock from falling into the hands of a legatee or an heir whom the survivor believed would not be an agreeable associate. Likewise, the option afforded the survivor opportunity to gain 100 per cent control of the corporation by exercising the option. A surviving stockholder who believed that an heir or legatee would not be a satisfactory stockholder or would sell his stock to a competitor, by exercising the option, could prevent the unfavorable development from occurring.
It is clear, then, why shareholders in close corporations engage extensively in the restriction of stock transfers. The giving of a stock option to a prospective surviving shareholder to be exercised upon the death of the optionor is, as we have just seen, an effective method whereby the survivor can prevent an unsatisfactory heir or distributee from sharing with him in the future conduct of the business. An option of that kind enables the survivor to purchase, at the price fixed by the deceased, the stock that would otherwise descend to the heir or legatee. Thus, the option gives him a sort of veto power over the heir or legatee.
It is in such a setting that the execution of the option in plaintiff's favor occurred. And it is in that setting that the option must be considered. Otherwise, the avowed purpose of determining the purpose of the parties becomes mere verbiage. When the document before us is considered upon that background *134 it becomes apparent that the parties had a purpose which they did not put fully into writing. The question to be resolved is whether, when the purpose of giving the option was to protect the survivor from encroachment by outside interests, the parties to the option intended that an outsider such as the plaintiff had become could exercise the option.
Pinnacle Packing Co. v. Herbert, 157 Or 96, 70 P 2d 31, quoted approvingly the following:
The following is quoted from Sacramento Navigation Co. v. Salz, 273 U S 326, 47 S Ct 368, 71 L Ed 663 (1927):
*135 Upper Columbia River Towing Company v. Glens Falls Insurance Company, 179 Fed Supp 705, ruled:
We take the following from 17 CJS, Contracts, § 328, page 778:
Williston on Contracts, revised edition, § 1293, states:
We take the following from Corbin on Contracts, § 632:
We will revert for a moment to the circumstances under which the options were signed. The plaintiff became a minority shareholder in the corporation at its inception in 1927. The relationship between the two men in this earlier period was satisfactory, for in addition to being the only stockholders in this corporation they became engaged in a joint venture of an undisclosed nature which was independent of the foundry. That venture also was terminated when their cordial relationship came to an end and the plaintiff resigned his offices in the corporation. The foregoing warrants a belief that the two men felt that if they could continue to control and administer the policy of *137 the corporation, its promising outlook would extend into the future. To that end the stock options were executed. No one claims that their purpose was to enable the survivor to purchase the deceased's stock at a low price to the disadvantage of the widow, but, as we saw through quotation of testimony given by the plaintiff, their purpose was protection for the survivor, more particularly, the protection of his interest in the business.
Clearly these agreements would never have been entered into in the absence of cordial relations, mutual trust and confidence. Nor would they have been executed if the parties had thought that the then existing relations would cease. It is apparent that the agreements contemplated the continued existence of the friendly relationships as a condition to their fulfillment. We must never forget that both options looked forward for a period of possibly many years into the distant future, for each option stated that it was "to take effect only in the event of my death." The purpose of each option was the protection of the survivor in his ownership of his stock and his future conduct of the business. Therefore, they contemplated continued ownership of shares in the corporation as a prerequisite to exercise of the options. For unless the optionee held some stock in the corporation he had nothing to protect.
The evidence which is reviewed in preceding paragraphs shows that when the plaintiff and the deceased signed the two option agreements they did not anticipate that their friendship would end, that Stirnweis would lose confidence in the plaintiff, that the latter would cease being an officer in the corporation and would sell all of his stock to Stirnweis. When the options were given both were officers in the corporation *138 and both were shareholders. The purpose of the options was the protection of shares owned by the survivor. Thus, they took it for granted that the survivor would be a shareholder. They assumed, when they signed the options, that both would be shareholders when the first of them died. The evidence of which we have taken notice convinces us that whether they uttered words to that effect or not they intended that each optionee should continue to be a shareholder in order to be eligible to purchase the stock of the deceased shareholder.
When the plaintiff sought to exercise the option he owned no stock in the corporation. He was, therefore, not eligible to exercise the option. He had terminated it when he sold his stock.
Plaintiff contends that because the option makes provision for its revocation by giving him written notice, all other methods of revocation are excluded. We find this contention without merit. The provision to which plaintiff refers permits that particular method. It does not imply in any way that that method is intended to be exclusive.
The decree of the circuit court is affirmed. Costs and disbursements will be allowed to neither party.
Justice GOODWIN concurs in this opinion.
Chief Justice McALLISTER and Justice PERRY concur in the result.