Opinion ID: 1953067
Heading Depth: 1
Heading Rank: 1

Heading: The Young-Brooks Transfer

Text: Kinzua Oil and Gas Corporation, a Pennsylvania Corporation with a registered office in Erie, Pennsylvania and a general business office in Bradford, Pennsylvania, was incorporated in 1942 by Arthur Stone Dewing of Newton, Massachusetts, Charles C. Davis of Kane, Pennsylvania, and appellant Fred Young. The authorized capital stock of the corporation was and is 10,000 shares of common stock, all of which were issued initially to Dewing and members of his family, except for one share each to the other two incorporators. On or about July 19, 1960, the Dewing family sold its entire interest in Kinzua, 9,998 shares, to Fred and Mercedes Young for $10,000. At approximately the same time Arthur Dewing resigned as president of Kinzua, and Fred Young assumed that office as well as the office of treasurer. Although a man of sound mind, Fred Young was then in his seventies. Primarily a holding company, Kinzua's principal asset is 1143 of the 1500 authorized and outstanding shares of the preferred stock of Kane Gas, Light and Heating Company, a public utility corporation supplying natural gas to the public in and around Kane, Pennsylvania. Because of certain defaults in the payment of dividends on the Kane Gas preferred stock, Kinzua has voting control of Kane Gas. From 1960 to 1967, Fred Young was president of Kane Gas as well as Kinzua, and both companies shared common offices in Kane, Pennsylvania. Prior to his association with Fred Young and apparently unknown to Young, appellee Brooks had been convicted of the federal crime of stealing checks from the mail entrusted to his custody as a United States mail carrier. Beginning in 1962, he entered the employ of Kane Gas on a part-time basis as an accountant and tax consultant and in these capacities assisted and advised George Lupfer, the assistant treasurer of Kane Gas, in preparing the consolidated federal income tax returns for Kane Gas and its subsidiaries. In addition Brooks did much of the accounting and all of the federal tax work for Kinzua from 1962 until late in 1967, throughout which period he had free access to all of Kinzua's books, records, minute books, stock records and files. Until the present controversy Young considered Brooks a friend and trustworthy advisor in tax and accounting matters. The trust and confidence placed in Brooks is exemplified by his practice of routinely preparing and submitting letters, income tax returns, financial statements and various other papers which Young relied upon and signed without question. In addition to corporate business, Brooks also frequently consulted with Young about Young's personal tax problems, and the latter often relied and acted upon the information so obtained. The specific series of events giving rise to the present appeal was precipitated initially by an agent of the Internal Revenue Service named Dushaw who appeared at the common offices of Kinzua and Kane Gas late in 1966 with authority to audit the financial records underlying the federal tax returns of both corporations. Under instructions from Young, Brooks worked very closely with Dushaw for the ensuing several months, and on March 13, 1967, after the conclusion of the tax audit, the Internal Revenue Service District Director issued a deficiency assessment against Kinzua for $11,814.63, a sum representing additional income tax allegedly owed by Kinzua for the year 1960. According to Brooks, Dushaw informed him in the course of one of their private meetings that similar assessments would probably be levied against Kinzua for the years 1961-1967 and that the holder of record of the Kinzua stock at the date of any assessment against Kinzua would be personally liable to pay that particular assessment. Brooks related this information to Young and, according to Young, advised him that the assessment against Kinzua could be successfully defeated by placing the Kinzua stock in the name of a nominee for tax purposes only. Young testified further that he relied upon this advice and attempted to register his stock and that of his wife [1] in the name of Brooks and Grace Mattison, Kinzua's corporate secretary, by placing 5,000 shares in the name of each. Miss Mattison at first agreed to this arrangement but later complained that she could not permit the registration in her name of stock belonging to the Youngs, whereupon Brooks offered to take the 5,000 shares off Miss Mattison's hands. Thereafter two 5,000 share certificates, each in the name of Brooks, were prepared and signed. Brooks' version of the Kinzua stock transfer is much different. According to him, Young's concern upon being informed of his potential personal liability for any tax assessments against Kinzua resulted in a series of discussions culminating in the following oral contract: Young agreed to transfer to Kinzua a valuable oil lease known as the Gavin lease and to transfer to Brooks his and his wife's 10,000 shares of Kinzua stock, in return for which Brooks promised to pay any tax liability resulting from any deficiency assessments levied against Kinzua. The only other documentary evidence relating to the Kinzua stock transfer is a written memorandum dated March 30, 1967 and signed by both Brooks and Young. That memorandum reads in material part as follows: Fred W. Young of Erie, Pa., and Melvin J. Brooks of Salamanca, New York, have caused their signatures to be affixed to this memorandum as evidence that the said Fred W. Young has transferred unto the said Melvin J. Brooks any interest that he might have in the Kinzua Oil and Gas Corporation for good and valuable consideration, receipt whereof is hereby acknowledged and in further consideration of the promise of the said Melvin J. Brooks to assume and pay a certain undetermined income tax liability which the parties understand and expect will be assessed against the said Kinzua Oil and Gas Corporation in an amount of approximately Ten Thousand Dollars ($10,000.00), be the same more or less. After trial of this matter, the Court of Common Pleas of McKean County dismissed the Youngs' complaint. While admitting that certain facts of the instant case were greatly troubling, such as the prior criminal record of certain of the appellees, [2] the court chose to credit Brooks' testimony rather than that offered by Young and having made that finding reasoned as follows: This court rejects the plaintiffs' contention that they were victims of Brooks' fraud, but rather concludes that Fred W. Young, acting for both himself and for Mercedes Young, his wife, for whom he had authority to act, made a binding contract in the fall of 1966 with Melvin J. Brooks for the sale of Kinzua Oil and Gas Corporation, and that the same was ratified by a subsequent written agreement under date of March 30, 1967 which was properly executed and supported by consideration. The burden of proof to establish fraud rested on the plaintiffs, and they have not met that burden by the evidence presented in this case. . . . Recognizing that the trier of fact is uniquely situated to best resolve questions of credibility, we cannot conclude that the trial court's decision to believe Brooks' contract theory of the stock transfer rather than Young's nominee theory of the transfer was clearly erroneous. Moreover, the trial court quite correctly stated the general rule that a party seeking to avoid or undo a contract on the basis of fraud bears the burden of proving fraud. See, e.g., Aliquippa National Bank v. Harvey, 340 Pa. 223, 16 A. 2d 409 (1940). This general rule, however, presupposes contracting parties legally free to deal at arm's length, and we believe that on this record Brooks was bound to a much higher duty in his dealings with Young. When the relationship between persons is one of trust and confidence, the party in whom the trust and confidence are reposed must act with scrupulous fairness and good faith in his dealings with the other and refrain from using his position to the other's detriment and his own advantage. McCown v. Fraser, 327 Pa. 561, 192 Atl. 674 (1937); Null's Estate, 302 Pa. 64, 153 Atl. 137 (1930); Popovitch v. Kasperlik, 70 F. Supp. 376 (W.D. Pa. 1947); see generally 17 C.J.S. Contracts § 184 (1963). This well settled doctrine, founded on strong considerations of public policy, renders inapplicable the general rule requiring an affirmative showing of fraud. To the contrary, transactions between persons occupying a confidential relationship are prima facie voidable, and the party seeking to benefit from such a transaction must demonstrate that it was fair, conscientious and beyond the reach of suspicion. Leedom v. Palmer, 274 Pa. 22, 25, 117 Atl. 410, 411 (1922). See also McCown v. Fraser, supra at 564, 192 Atl. at 676. It is impossible to define precisely what constitutes a confidential relation. McCown v. Fraser, supra, 327 Pa. at 564, 192 Atl. at 676. It is not restricted to any specific association of persons nor confined to technical cases of fiduciary relationship but is deemed to exist whenever the relative position of the parties is such that one has power and means to take advantage of or exercise undue influence over the other. McCown v. Fraser, supra; Longenecker v. Zion Evangelical Lutheran Church, 200 Pa. 567, 50 Atl. 244 (1901). Accordingly, a confidential relationship generally exists between trustee and cestui que trust, guardian and ward, attorney and client, and principal and agent. Leedom v. Palmer, supra, 274 Pa. at 25, 117 Atl. at 412. Turning now to the facts of the present case, our reading of the record convinces us that a confidential relationship did indeed exist between Brooks and Young. Though a man of sound mind, Young was an octogenarian at the time of the disputed stock transfer. He possessed no apparent knowledge of the intricacies of the federal personal and corporate income tax laws and had no independent advice on such matters, relying instead upon the trusted advice of Brooks, his tax consultant. Moreover, Young often signed without question tax and other financial documents prepared by Brooks. The contract for the sale of Kinzua to Brooks was motivated by tax considerations brought to Young's attention by Brooks and the consideration given by Brooks was the assumption of an alleged tax liability. In these circumstances, there can be little doubt that Brooks was in a position to take advantage of Young. Having concluded that Brooks and Young occupied a position of confidential relationship, there remains to be decided whether the record contains evidence that the transfer was fair, conscientious and beyond the reach of suspicion. As stated above, the Youngs purchased the Kinzua stock in 1960 for $10,000, and in 1967 Fred Young donated to the corporation a valuable oil lease and transferred all of the capital stock to Brooks. Several months later Brooks resold the stock to a third party, Traner Associates, for $50,000 plus Traner's promise to indemnify Brooks up to $60,000 for any personal tax liability accruing to Brooks as a result of any tax assessments against Kinzua. The stock transfer from Young to Brooks was motivated by considerations of tax avoidance, and Young had no independent advice on the matter. To date, no one has ever received a tax assessment imposing personal liability of Kinzua's taxes. It would strain credulity to characterize this set of circumstances as fair and beyond the reach of suspicion, and we therefore hold the Young-Brooks transfer voidable. We must next consider whether Traner Associates has a claim to the Kinzua stock superior to that of Young.