Court Opinion

ID: 9455271
Source: CourtListenerOpinion
Date Created: 2023-08-04 19:17:15.595694+00
Date Added: 2024-06-11T17:34:32.108691
License: Public Domain

COMBS, Circuit Judge
(dissenting).
I do not disagree with the majority’s statement of the legal principles applicable to this case, but I think there is a total lack of proof to sustain the theory of the case on which they rely.
The District Court directed a verdict for the Government at the close of taxpayers’ evidence on the theory that taxpayers had purchased Lenk Manufacturing Company with the corporation’s own money, thereby receiving a benefit which amounts to a constructive dividend. The District Judge, in his analysis of the case and statement of his reasons for directing a verdict, made no finding, either directly or indirectly, that these taxpayers were bound by reason of a personal contract to purchase stock in the Lenk Company. We cannot find after diligent search that he even mentioned such a contract. By no stretch of the imagination can it be gleaned from this record that he directed a verdict on this theory.
The majority have rejected the hypothesis on which .the District Judge relied and admit that, in the absence of a prior binding contract to buy the stock, taxpayers would not be liable for a tax. But, the majority find such a contract in the form of a letter offer from Kenneth W. Burke to Colonel Lenk dated *917October 21, 1961, and the acceptance by the Lenk group of the offer of “Kenneth W. Burke and his associates” dated November 3, 1961. The form of the acceptance had been written by Burke at the bottom of his letter. This letter and acceptance, to my mind, cannot be held as a matter of law to be a contract for several reasons. First, everybody who had anything to do with the letter and who testified in this case swore that it was not intended to be a contract. This included Kenneth W. Burke; H. C. Peart, the Lenk Company’s Kentucky accountant; and Burton Lenk, Colonel Lenk’s son and the only member of the family to testify. Jo T. Orendorf, the attorney who handled the exchange of stock and money which consummated the sale, testified it was his understanding “there was no binding obligation to sell.” Significantly, no one testified that the October 20-November 3 letter and acceptance was intended as a contract. The substance of the testimony of all the witnesses who knew about the letter and acceptance is that it was intended only for Burke’s use in his efforts to borrow money with which to buy the company. For example, Burton Lenk, a signatory to the acceptance, testified:
“The purpose of this letter was merely to show that we would agree at some future date to a price of $550,-000 for this business. The further purpose of this letter was to help enable Ken and his associates or the company or somebody in Kentucky to raise the money to buy this business. As far as I am concerned, that is all this letter intended.”
If the parties to an instrument which on its face appears to be a contract do not intend it as such, it will not be enforced against them. Long v. Jones, Ky., 319 S.W.2d 292 (1959) ; Johnson v. Dalton, Ky., 318 S.W.2d 415 (1958); Murphy v. Torstrick, Ky., 309 S.W.2d 767 (1958). If the intent of the parties is a disputed question of fact, it should be submitted to a jury. This rule is particularly applicable here because this instrument on its face does not appear to be a contract. No capable lawyer would prepare a contract covering a $500,000 deal by identifying the purchasers as “Kenneth W. Burke and his associates.” The letter was signed only by Burke, and only by use of the word “associates” is anyone except Burke identified. It is established, however, beyond any possibility of doubt that the “associates” were an imaginary group at that time. The associates, with perhaps two exceptions, were later recruited by Burke and induced to buy stock in Franklin Manufacturing Company in the hope of acquiring stock in Lenk Manufacturing Company. There is no testimony that any of these taxpayers knew that the Burke letter of October 20 had been written. Burke is not a party to this suit. So, even if it should be admitted that the letter and acceptance constituted a contract as to him, that is not helpful here. The question whether Burke and the Lenk group intended the October 20-November 3 letter and acceptance to be a contract should have been submitted to the jury.
The majority hold that, though taxpayers were not parties to the October 20-November 3 letter and acceptance, they became personally liable to buy the Lenk Company because they somehow ratified Burke’s action in writing the letter. I find no evidence of substance showing ratification. Certainly, there is not sufficient evidence to justify a directed verdict on this issue. Eleven of the taxpayers testified and only one, A. L. Dodd, gave any significant testimony in regard to ratification. Dodd agreed in a somewhat argumentative exchange with Government counsel that Burke must have been representing “the people who originally, later became the stockholders of Franklin Mfg. Company.” All the others testified they had not designated anyone to represent them and that they had not confirmed or ratified any prior action taken by any other person. It seems to me this testimony has to be accepted at face value. Since many of these people were not recruited until *918several weeks after the letter-acceptance had been written, there is no reason why they would have known about the letter or have been requested to ratify it. The quotation from Burton Lenk’s testimony noted in the majority opinion as to what Burke said is to my mind of little consequence. Assuming that Burke did say to the Lenk group, “I will have to go back and talk with my people,” this is hardly binding on “my people” who at the time were unknown to Burke and unknowing about his activities.
There is a suggestion in the majority opinion that the taxpayers ratified Burke’s prior action when they signed what is referred to as an escrow agreement. I find absolutely nothing in the escrow agreement which could be construed as ratification of prior action taken by Burke in obligating himself to buy the Lenk Manufacturing Company. This was nothing more than an instrument signed by all the subscribers to the capital stock of Franklin Manufacturing Company agreeing that Orendorf, the attorney, would have authority to negotiate a loan from Precision Valve Corporation and to use the proceeds for payment of stock in Lenk Manufacturing Company. The Burke letter and the Lenk acceptance are not mentioned or referred to, directly or indirectly, in the escrow agreement. To prove ratification of a contract, it is necessary to show that the person who is to be bound had material knowledge of all relevant facts at the time of his ratification. Restatement of Agency (2d) § 91; Elk Valley Coal Co. v. Thompson, 150 Ky. 614, 150 S.W. 817, 822 (1912). It is also the rule in Kentucky that “When there is evidence of acceptance of benefits and ratification there is a question for the jury.” Tarrants v. Henderson County Farm Bureau, Ky., 380 S.W.2d 274, 277 (1964).
To the extent that it is implied in the majority opinion that these taxpayers have by some sleight of hand acquired a $500,000 corporation by putting up only $155,000, I submit the implication is unwarranted. Assuming the value of Lenk Manufacturing Company to be $500,000, we have this situation:
Burke and two others already owned eleven plus per cent of the corporation, total value approximately $ 67,000 Burke and these taxpayers advanced 155,000 The corporation, by agreement of these taxpayers as stockholders, assumed a mortgage the proceeds of which were paid to Colonel Lenk in the amount of 250,000
Total $472,000
According to my arithmetic, taxpayers’ bargain was not tremendous.
I would remand the case for development of the facts in regard to the existence of a contract and the issue of ratification, with directions that substantial issues of fact on these questions be submitted to the jury.