Court Opinion

ID: 9760967
Source: CourtListenerOpinion
Date Created: 2023-08-29 01:26:46.526162+00
Date Added: 2024-06-11T07:29:19.324045
License: Public Domain

Hammond, J.,
filed the following dissenting opinion, with which Bruñe, C. J., concurs.
Not only did the Court declare that stockholders in a close corporation should provide in a funded buy-sell agreement that the insurance proceeds should become part of the value of the shares of a stockholder who dies (because the Court felt this to be the equitable arrangement), but also, despite strong intrinsic and extrinsic evidence that they did not so intend, went on to decide that the stockholders before us had agreed that the insurance proceeds were to be corporate assets (because the stockholders must have intended what the court thought equitable).
Whether or not close corporation stockholders should do what the Court thought equitable, depends on the particular circumstances and has little to do with the answer to the question presented by the record—did the stockholders of The Land and Simmons Company agree by their integration that the insurance proceeds were to be considered in setting the purchase price of a stockholder who died. To me there was most convincing evidence that they did not.
The written agreement was that the purchase price of the shares of a deceased stockholder should be “an amount equal to the book value thereof, determined in accordance with accepted accounting practices, at the time of the death of the stockholder whose stock is to be purchased.” This may be said to be a model of ambiguity in that it is made up of three variables, with no constant. The term “book value” alone, and with the embroidery of “accepted accounting practices,” and the phrase “at the time of the death,” all are imprecise in meaning and connotation. Taking up the last first, Mr. Justice Harlan, speaking for a majority of the Supreme Court in United States v. Louisiana, 363 U. S. 1, 4 L. Ed. 2d 1025, *2171036-1037, pointed out what can hardly be disputed—when he said that the phrase “at the time” can mean any of at least three points in time. (The phrase there under consideration was “at the time such State became a member of the Union”). He said: “Indeed, if ‘at the time’ were to be taken in a perfectly literal sense, it could refer only to the timeless instant before which the consequences of not being a State would obtain, and after which the consequences of Statehood would follow * * *. In short, if the term is to be given content it must be read as referring either to some time before or after the instant of admission or to both times. * * * It is urged that the disjunctive use of the terms ‘prior to’ and ‘at the time,’ shows that the latter must have been used to refer to the time after admission, since the phraseology would otherwise be redundant * * *. But, as has already been indicated, ‘at the time’ inherently can also be taken as referring to the pre-admission period * * *. And, on that basis there would be no redundancy in the phrase ‘prior to or at the time’ if ‘at the time’ meant immediately before the instant of admission and ‘prior to’ referred to times substantially prior to admission * *
The meaning of “book value thereof, determined in accordance with accepted accounting practices” likewise is inconclusive. “Despite the very extensive use of the term ‘book value’ by attorneys and accountants there is no definition that has universal acceptance. Its adoption, as a method of valuation in ‘buy-sell’ agreements therefore can prove needlessly costly and inequitable.” Block, Book Value Pitfalls in Buy-Sell Agreements, 95 Trusts and Estates 408. The opinion of the majority in this case rightly points out that the meaning of the term “book value” would not “be materially altered by the addition of the words ‘determined in accordance with accepted accounting practices.’ ” In 2 O’Neal, Close Corporations, Sec. 7.24, the author perceptively observes: “Whenever the transfer price of shares is to be fixed by their book value, draftsmen often insert a statement that book value is to be determined in accordance with ‘generally accepted accounting practices’ or ‘standard accounting principles.’ As broad alternatives are encompassed within accepted account*218ing methods, the definiteness which the quoted standards appear to create is rather illusory.” (Emphasis supplied.) Page, Setting the Price in a Close Corporation Buy-Sell Agreement, 57 Mich. L. Rev. 655, 664, says: “It is absolutely essential that the agreement spell out exactly what is meant by ‘book value/ who is to make the determination of disputed items, and thé conclusiveness of that determination. The inclusion of some vague phrase limiting ‘book value’ in accordance with ‘generally accepted accounting practices’ or ‘recognized accounting principles’ is of less than no help since it invites a dispute as to what practices and principles are so accepted and recognized.”
The Committee on Terminology of the American Institute of Accountants reporting in the October 1956 issue of the Journal of Accountancy, beginning at page 67 under the heading “Accounting Terminology Bulletin Number 3—Book Value,” said that the term book value is loose and inconclusive and decried its use, even though the direction is to determine it in accordance with accepted accounting practice or recognized accounting principles. The Committee went on to point out that the words “book value” are often used in business arrangements documents such as buy-sell agreements, and said: “When used in such documents, the meaning to be ascribed to the term is a question of legal interpretation of the document and appears to depend primarily on the intent of the contracting or other parties rather than on any accounting definition of such term. While such uses of the term are common, they have given rise to misunderstandings and can easily develop into controversies when the intention of the parties is not clear.” See also to the same effect 53 Mich. L. Rev. 972, 979; 71 Harv. L. Rev. 687, 692; and annotation “Meaning of Book Value of Corporate Stock,” 51 A.L.R. 2d 606, 609.
It seems apparent that the accountant who testified that it would be in accord with accepted accounting practices either to include or to exclude the insurance proceeds as corporate assets, as the intention of the parties dictated, was entirely correct and put the question to be decided in a nutshell.
That the integration of the parties was intended to mean, *219and meant, that the insurance proceeds were not to be included as part of book value follows whichever of three possible paths is walked. If the key words of the integration are ambiguous on their face, as has, I think, been shown, or if analysis and interpretation of the integration as a whole reveal it to be ambiguous, the parol evidence that was offered (but rejected below and by the majority) demonstrates that the insurance proceeds were not to be a part of corporate assets and so eliminates any need for resort to presumed intentions relied on by the majority. If analysis and interpretation of the integration shows, as I think it clearly does, that intrinsically it means that the insurance was to be excluded in figuring book value, there is no need to pass to the extrinsic evidence which demonstrates the same thing.
In determining whether the integration as a whole is ambiguous, the tests to be applied are those same objective standards which should be used to interpret the meaning of the integration. Restatement, Contracts, Sec. 231 (“Where application to an integration of the standard of interpretation stated in Sec. 230 produces an uncertain or ambiguous result, the rules governing the interpretation of agreements which have not been integrated are applicable”). Section 230, which has been referred to with approval by this Court in Ray v. Eurice, 201 Md. 115, 127, and Weber v. Crown Central Petroleum Corp., 214 Md. 115, 120, says the integration means what a reasonably intelligent person acquainted with all operative usages and knowing all the circumstances prior to and contemporaneous with the making of the integration would take it to mean (unless the application of that standard of interpretation produces an ambiguous result).
Insurance is used in buy-sell agreements to provide money which otherwise would not be available for the purchase of the stock of the deceased holder. The reasonably intelligent businessman would not customarily and normally visualize the use of the fund fortuitously provided by death to increase the value of the thing to be bought with the fund, and, it should not be presumed that he so intended unless he has left no doubt that he did. The pyramiding required to result in enough insurance to provide the net amount of the purchase *220price is apparent. Take for illustration an extreme example: A corporation worth $100,000 with A owning ninety-nine shares ($99,000) and B one share ($1,000). If the proceeds of the insurance were required to be added to the corporate assets, it would take $9,900,000 of life insurance on the life of A for B, as the survivor, to wind up with the $100,000 corporation. Guild, Stock-Purchase Agreements and the Close Corporation (1960). The cost of sufficient insurance, if it could be procured, often would be beyond the ability of the corporation to provide and would invite federal tax questions as to unreasonable accumulation of surplus.
That businessmen habitually do not plan to have the insurance proceeds become a part of the assets the insurance is to buy is shown by the many buy-sell agreements where the purchase price is to be fixed at an agreed dollar value, by a formula fixed by earnings, or by a formula based on excess profits. Stock-Purchase Agreements and the Close Corporation, supra, (pps. 31-32). It is further shown by the number of buy-sell agreements in which the insurance is paid to a trustee who delivers the stock to the corporation and the purchase price (the insurance proceeds which were payable to the trustee) to the estate of the deceased stockholder. In the latter cases there is no question of the insurance increasing the corporate assets since the corporation does not receive the insurance money. There is no real difference in substance and effect between a trusteed buy-sell agreement and one whereby the corporation receives the insurance proceeds under a binding obligation to pay them over to the estate of the shareholder who has died. As between it and its stockholders and their personal representatives, the corporation is a virtual trustee, taking and holding title to the policies, the cash surrender values, if any, and ultimately the proceeds, as a fiduciary and not for its own account.
The contention that there cannot be equity and fairness unless a proportionate share of the insurance proceeds is added to the value of the stock of him who helped pay for the insurance understandably has become a shibboleth of life insurance company literature on the subject, (one example is cited by the majority opinion) and other writers have *221pointed out that it is an abstract truth. However, almost all who have written on the subject recognize that buy-sell agreements which do not add insurance proceeds to corporate assets can be, and often are, fair and most effective.1 In everyday practical operation the “perfect equity” theory generally is specious. The benefits to be obtained by using fully funded buy-sell agreements leads businessmen to take what they can afford, what they can get, and what will do the job they want done. Like the insurance company that issues the policy, each shareholder knowingly gambles on when he will die in relation to his fellow shareholders. The perfect equity talked about could be obtained by each stockholder insuring his own life in sufficient amount, if he can afford to. Then, *222however, when he dies, his estate, subject to Federal Estate tax, would include both the insurance proceeds and the value of the stock and the impact of the tax would whittle away the insurance proceeds bought to pay the tax. One of the benefits of funded buy-sell agreements arranged at arms length is to get cash to pay estate taxes without increasing the value of the estate by the amount of the cash obtained— the very converse of the perfect equity theory—because only the value of the stock is subject to estate tax, and the insurance proceeds are not.
Other practical factors make those who enter into funded buy-sell contracts at arms length forget the perfect equity theory. Generally, those who make them cannot pay for adequate insurance except with money taken from the corporation involved. The pay-out almost always must be in the form of dividend or salary. Either way personal income taxes take so much there are few tax depleted dollars left for insurance purposes. It is generally much easier and more effective to have the corporation pay the premiums from available surplus. While the premiums are not deductible for corporate income tax purposes, they are recognized as paid pursuant to a proper business purpose. Yet there is a real and practical limit to how much insurance most close corporations can afford. Most can pay the premiums necessary to buy insurance enough to pay for actual value of the stock involved but rarely for the additional value added each time more insurance is taken out.
The benefits of the funded buy-sell agreement usually are more than enough to make its participants use it without trying to achieve theoretically perfect equity. Particularly is this true of the older stockholder who (like Mr. Arconti in the instant case) has accumulated enough property to be estate tax conscious and who is planning for the time the tax must be paid. In exchange for paying premiums on insurance, which will not be credited to his share of the corporate assets when he dies, he provides cash (which his estate would not otherwise have) to pay estate taxes without increasing his estate subject to tax. If a stockholder in a close corporation dies without providing funds for the purchase *223of his stock, his beneficiaries are at the mercy of the surviving stockholders because usually the stock has no other market. The surviving beneficiaries must choose between a forced sale at a sacrifice price or unwilling ownership participation in the business, with friction almost inevitable as to the wisdom of management, the question of salaries versus dividends, and so forth. The funded buy-sell agreement gives the corporation cash it would not otherwise have to buy stock otherwise almost unsalable. It provides assurance of continuity and harmony of management and, even during the lifetime of the parties, the very existence of the agreement may well exert a stabilizing and reassuring influence on employees, creditors and business associates. A stockholder usually is happy to achieve all these benefits, particularly the assurance of getting in cash at his death the value of his interest as he counts it, without seeking a profit arising from the death.
The reasonably intelligent man would find much persuasive evidence in the integrated agreement to indicate that the parties before us conformed to the norm and did not intend the insurance proceeds to be part of book value. Paragraph 5 provides that if the “net book value of the stock of the Corporation” increases to a point where the insurance in force will not pay for the stock of a deceased stockholder “at its book value”, the Corporation obligates itself “to increase said life insurance accordingly.” “At its book value,” used in reference to a time when insurance proceeds are only prospective, indicates existing book value without thought of increase by the addition of such proceeds. Further, there is no hint, much less specific mention, of increasing life insurance to the point where it will cover not only existing hook value but that value added to by the life insurance proceeds. There is available a computation which will give the gross insurance needed to produce a net value made up in part of the proceeds of the insurance (as in the case of a bequest free of inheritance tax where the amount of the tax bequeathed is itself subject to tax and the gross amount of the legacy must be determined by formula—for example, legacy $1,000, tax 7y2%—$1,000 x 100/92.S equals $1,081 and a tax of 7y% of $1,081 leaves $1,000—see Bouse v. Hutzler, *224180 Md. 682). There is no suggestion of any calculation as to an amount of necessary pyramided insurance; surely it cannot be gleaned from the obligation “to increase said life insurance accordingly.”
Paragraph 6 says that if the proceeds of insurance in effect on the life of a stockholder exceeds the purchase price of his stock “said excess amount shall belong to the Corporation.” (Emphasis added.) There is a clear connotation that the excess becomes the property of the corporation, not that it remains its property, which indicates that insurance proceeds needed to pay for stock were never to be corporate assets. There is a similar indication in Paragraph 7. Paragraph 8 says that a stockholder desiring to sell his stock first must offer it to the other stockholders “at a price established as directed by this agreement in case of the death of a Stockholder.” This can only mean at a price equal to book value at the time of the offer. The insurance in effect at the time of the making of the agreement was term insurance with no cash surrender value. Therefore “an amount equal to the book value thereof * * * at the time of the offer,” to paraphrase the words used as to value at time of death, could only mean book value determined without reference to insurance or its proceeds or avails.
At this point, if the reasonably intelligent layman were not convinced that the integration meant to exclude insurance proceeds from book value, if he found the writing ambiguous or doubtful on the point, he would, I have no doubt, seek immediately the direct, articulate parol testimony of disinterested witnesses and, if he were told that the law required its rejection in favor of a presumption that the parties intended what the Court thought they must have intended he would react with astonished disbelief. There is no reason to so perplex him for extrinsic evidence in two aspects is admissible in case of doubt and at the worst, from the appellants’ point of view (and mine), the integration was ambiguous. Parol evidence was admissible to show the construction put on the integration by the acts of the parties, and also to show otherwise its true meaning.
“Conduct of the parties to a written contract not only may *225amount to construction of ambiguous provisions but may evidence subsequent modification of the contract. Williston on Contracts, Rev. Ed., sec. 623.” Saul v. McIntyre, 190 Md. 31, 36, quoted in Evergreen Amusement Corp. v. Milstead, 206 Md. 610, 616-617, and Solomon’s Marina v. Rogers, 221 Md. 194, 198. To the same effect is Globe Home Imp’v’t Co., Inc. v. McCarty, 204 Md. 513, 516.
“* * * but where doubt arises as to the true sense and meaning of the words themselves or difficulty as to their application under the surrounding circumstances, the sense and meaning of the language may be investigated and determined by evidence dehors the instrument.” Eastover Stores, Inc. v. Minnix, 219 Md. 658, 666. Rinaudo v. Bloom, 209 Md. 1, 11; Vary v. Parkwood Homes, Inc., 199 Md. 411, 418; Sommers v. Dukes, 208 Md. 386; Restatement, Contracts, Sec. 231.
The parties before us showed in various ways that they did not intend insurance proceeds to be part of book value. The agreement was dated November 25, 1952. At that time the net worth of the company was some $51,000. If the insurance proceeds were to be added, the half share' of Mr. Arconti would, at the very execution of the contract, exceed the insurance on his life. The company explicitly obligated itself to increase the insurance so it would always be enough to fund the agreement and, although its net worth increased from five to fifteen thousand dollars a year—an average of over ten thousand a year, the insurance, over the years, was never increased. This is completely inconsistent with an intent to have insurance proceeds added to corporate assets.
In August 1956 the buy-sell agreement was modified to provide that “* * * under no circumstances [shall] outstanding shares representing 25% of the company’s stock be worth less than $25,000 in value or outstanding shares representing 50% of the Company’s stock be worth less than $50,000 in value.” The net worth of the company was then almost $90,000 and was increasing an average of $10,000 a year. Mr. Arconti’s share, if the $50,000 insurance on his life were to be added to the $90,000, would have been $70,000. Mr. Land’s and Mr. Simmons’ shares, if their $25,000 face value *226of insurance were to be added to the $90,000, would have been $28,750 each. What sense did it make to provide that Arconti was to get the full $50,000 and Land and Simmons their full $25,000 each if the insurance proceeds were to be included in determining book value? It made none and obviously they did not so intend. They acted as they did because they knew the book value of their respective interests, figured as they intended, was less than the insurance on their respective lives.
Mr. Arconti, after the execution of the integration, in planning his estate and providing funds to meet death taxes, listed current values of all his assets. The dollar amount assigned by him to his Land and Simmons stock was consistent with the intent that the insurance proceeds were not to be part of book value and inconsistent with an intent that they were to be. Two disinterested and experienced estate counsellors to whom the information was given in the course of business were prepared to so testify.
There was also available the testimony of those same two that at the time the insurance was bought, and also after the execution of the agreement, the expressed intent of all of the parties was that the price of the stock of a deceased shareholder was to be ascertained without reference to the insurance proceeds. A member of the insurance firm that bonded the corporation was prepared to testify that the three stockholders had informed him to exactly the same effect. He obtained the information in the course of his investigation in connection with the issuing of bonds, and regarded the buy-sell agreement as a stabilizing and favorable business factor.
The parol evidence which should have been admitted, if any doubt remained as to what was intended, makes certain what I believe the integration as a whole also makes clear— that Messrs. Arconti, Land and Simmons did not intend the insurance proceeds to be part of book value.
The cases of Block v. Mylish (Pa.), 41 A. 2d 731, and Rubel v. Rubel (Miss.), 75 So. 2d 59, which the majority found “directly in point,” recognized the rules set forth in this opinion but found them inapplicable on the facts. In each case the Court found evidence of plainly indicated in*227tent in the contract of the parties that the insurance proceeds should be added in proper proportion to the value of the assets to be bought at death. True, a cynic might infer that the Courts, like the majority in the instant case, were persuaded to find that intent because they thought the parties should have so intended. Nevertheless, the specific holding in each case was that the agreement before the Court showed by what it said and did not say a clear intent to include the insurance proceeds. The agreement before us shows a clear intent not to.
I would reverse. Judge Bruñe has authorized me to say that he concurs in the views expressed herein.

. In Survivor Purchase Agreements and Taxes, 98 Trusts and Estates, 880, 890, the author, speaking of the fact that the holder of a 75% stock interest in a close corporation bears 75% of the cost of the premiums paid by the corporation on buy-sell insurance says:
“It has been suggested that this problem can be solved by including in the valuation formula the cash surrender value of all the insurance policies plus the proceeds from the decedent’s policies. If there were numerous individuals involved, this approach might be feasible. However, if there are only two or three individuals the inclusion of the proceeds would increase the value of the business interest making necessary the purchase of even more insurance for funding purposes. Thus, inequities due to premium payments may result, even though the entity approach is used. But perhaps the risk of such inequities is justified by the greater ease of accomplishing the buyout through the entity(Emphasis supplied.)
“The use of Life Insurance to Fund Agreements Providing for Disposition of a Business Interest at Death,” 71 Harv. L. Rev. 687, says in note 34 at page 693, that it is not necessary to include the insurance proceeds as an asset to make the agreed price stand up for tax purposes. “Viewed as of the time of contracting, see note 30, supra, there may have been some other elements of value flowing to the decedent, and, without negating the existence of full and adequate consideration, he may have reasonably thought it worthwhile to forego an allowance in price equal to what would have been his share of the proceeds, especially when he, along with the other parties, considered it necessary and worthwhile to establish a fully funded agreement.”