Court Opinion

ID: 172017
Source: CourtListenerOpinion
Date Created: 2010-08-14 18:44:06+00
Date Added: 2024-06-11T17:25:16.805766
License: Public Domain

FILED
                                                             United States Court of Appeals
                                                                     Tenth Circuit

                                                                     April 9, 2009
                     UNITED STATES COURT OF APPEALS
                                                                 Elisabeth A. Shumaker
                            FOR THE TENTH CIRCUIT                    Clerk of Court

    NANCY KORNFELD; MEREDITH
    KORNFELD,

                Plaintiffs-Counter-
                Defendants-Appellees,

    v.                                                   No. 08-6131
                                                  (D.C. No. 5:07-CV-00438-L)
    JULIAN KORNFELD; PATSY D.                            (W.D. Okla.)
    PERMENTER, individually and as
    co-trustees of Julian P. Kornfeld
    Revocable Trust,

                Defendants-Counter-
                Claimants-Appellants.

                             ORDER AND JUDGMENT *

Before McCONNELL, McKAY, and GORSUCH, Circuit Judges.

         This case involves a dispute over the ownership of stock in a closely held

corporation. The matter was decided on cross-motions for summary judgment,

*
       After examining the briefs and appellate record, this panel has determined
unanimously to grant the parties’ request for a decision on the briefs without oral
argument. See Fed. R. App. P. 34(f); 10th Cir. R. 34.1(G). The case is therefore
ordered submitted without oral argument. This order and judgment is not binding
precedent, except under the doctrines of law of the case, res judicata, and
collateral estoppel. It may be cited, however, for its persuasive value consistent
with Fed. R. App. P. 32.1 and 10th Cir. R. 32.1.
and Julian Kornfeld and Patsy D. Permenter, individually and as co-trustees of the

Julian P. Kornfeld Revocable Trust, have appealed the district court’s judgment.

Exercising jurisdiction under 28 U.S.C. § 1291, we affirm.

                                          I

      Julian Kornfeld (Julian), an attorney, established a corporation in 1972 that

eventually became known as the Mernan Royalty Corporation (MRC).

Ms. Permenter served as Julian’s administrative assistant. MRC’s assets

consisted of oil and gas royalties, overriding royalty interests, and other interests.

Julian owned 100% of MRC’s stock until 1987, when he transferred all MRC

stock to his two daughters, Meredith Kornfeld and Nancy Kornfeld, appellees

here, in exchange for a private annuity to commence in 2015. Meredith and

Nancy each received 5,000 shares of MRC voting common stock, but at the time,

Julian did not deliver any stock certificates to them. 1 He continued on as MRC’s

president and, along with Ms. Permenter, the two managed the company and

maintained corporate records until their resignation in 2006. Although Meredith

and Nancy often signed corporate paperwork provided to them by their father,

neither had any meaningful involvement with MRC’s operation during Julian’s

tenure as its president.

1
       Although Julian also transferred all of his preferred, nonvoting stock, that
stock is not at issue in this case. All references to “shares” are to MRC’s voting
common stock.

                                          -2-
      Meanwhile, in 1990, MRC created an employee stock ownership plan

(ESOP) with Julian as its sole trustee. MRC issued and contributed shares of its

voting common stock into the ESOP until 1996. At that time, the ESOP held a

total of 2,956.41 shares (22.82%), and Meredith and Nancy each held 5,000

shares (38.59% each).

      In 1999, Julian signed an agreement of merger on behalf of MRC. In

exchange for $225,000, MRC issued 2,963.47 shares of its voting common stock

to the Alfred D. Goldman SNR-1 Trust in February 1999, and 7,260.82 shares to

the Estate of Alfred D. Goldman in June 1999. The cash involved represented

fees owed to Julian for services as trustee of the Goldman Trust and executor of

the Goldman Estate. In November 1999, MRC issued 75.5 shares of its voting

common stock to each of Julian’s daughters. At that point, the ownership of

voting common stock in terms of percentages was as follows: Goldman Estate,

31.12%; Goldman SNR-1 Trust, 12.70%; Meredith, 21.75%; Nancy, 21.75%; and

the ESOP, 12.67%. 2

      It appears that Julian did not inform Meredith or Nancy about the Goldman

merger at the time, and when they became aware of it, things turned litigious.

However, the parties, together with MRC and Jeannie Mitschke, who is Julian’s

wife, entered a settlement agreement in 2004. Among other things, the agreement

amended joint purchase agreements that Meredith, Nancy, Julian, and

2
      Percentages have been rounded and do not total 100%.

                                        -3-
Ms. Permenter had entered into for the purchase of bonds and stock:

Ms. Permenter agreed to convey to Meredith and Nancy her remainder interests,

and Meredith and Nancy agreed that upon Julian’s death, a life estate in the

income stream from those investments would be payable to Julian’s wife, Jeannie,

rather than to them. The settlement agreement also provided (1) for the

termination of Julian’s deferred private annuity; (2) for MRC’s redemption and

cancellation of the stock issued in the Goldman merger; and (3) terms for Julian

to repay loans he obtained from MRC on which he was in default. Paragraph

3.3.2 of the agreement pertained to the redemption and cancellation of the

Goldman shares and is at the heart of this appeal. It stated that MRC would

“evidence the payment to Julian, as executor and trustee of the Goldman Entities,

the $225,000 in redemption and cancellation of all of [sic] shares of stock of

MRC held by the Goldman Entities, restoring Meredith and Nan[cy] as the

rightful owners of the [voting common] stock of MRC, as follows:” Meredith

43.66%; Nancy 43.66%; and the MRC ESOP 12.67%. Julian provided stock

certificates to Meredith and Nancy for the first time when the parties met to sign

the settlement agreement in September 2004.

      In 2006, Meredith and Nancy entered into an agreement to sell all of

MRC’s stock. When informed of the pending sale, Julian argued that the ESOP

owned 22.55% of MRC voting common stock, not the 12.67% stated in the

settlement agreement. He further contended that he owned 49.75% of the ESOP’s

                                         -4-
shares and that Ms. Permenter owned 11.21%. Meredith and Nancy maintained

that the ESOP owned only 12.67%, as stated in the settlement agreement, and that

nothing in the settlement agreement set out the ownership of the ESOP shares.

      The sale of MRC went through in December 2006 for $800,000, but the

buyers deposited $109,998 of the purchase price into an escrow account, to be

distributed once the parties sorted out their dispute regarding the ESOP’s shares.

That sum represented the maximum amount to which Julian and Ms. Permenter

claimed entitlement under their theory of ESOP ownership.

      Several months later, Meredith and Nancy filed the underlying diversity

action seeking a declaratory judgment regarding the ESOP shares and damages for

breach of the settlement agreement. Julian and Ms. Permenter filed a

counterclaim requesting a declaratory judgment in their favor. After the parties

filed cross-motions for summary judgment, the district court issued two primary

rulings on the merits, the second of which came after supplemental briefing and a

hearing: (1) that the ESOP owned 12.67% of MRC voting common stock, as

stated in the settlement agreement, because any mistake was unilateral on the part

of Julian, not a mutual mistake; and (2) that based on the credible evidence of

their compensation in the years that MRC contributed stock to the ESOP, Julian,

Meredith, and Nancy each owned 33.33% of the ESOP’s shares, and

Ms. Permenter owned no ESOP shares. The court also denied appellants’ motion

to reconsider its first ruling. This appeal followed.

                                          -5-
                                         II

      Appellants challenge each of the district court’s merits rulings. Because

this case was decided on summary judgment, our task is to review the district

court’s decisions de novo, applying the same substantive legal standards. See

Simms v. Okla. ex rel. Dep’t of Mental Health & Substance Abuse Servs.,

165 F.3d 1321, 1326 (10th Cir. 1999). Summary judgment “should be rendered if

the pleadings, the discovery and disclosure materials on file, and any affidavits

show that there is no genuine issue as to any material fact and that the movant is

entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c).

      A. The ESOP’s ownership of MRC voting common stock

      Regarding the district court’s ruling that, as stated in the settlement

agreement, the ESOP owned 12.67% of MRC’s voting common stock, the central

thrust of appellants’ argument is that, after redemption and cancellation of the

Goldman shares, the parties stood in the same position as they did prior to the

Goldman merger: Meredith and Nancy each owned 5,075.5 shares of MRC voting

common stock, which equates to 38.72% each, and the ESOP owned 2,956.41

shares, which equates to 22.55%. In support, appellants advance a number of

sub-arguments that can be summarized as follows: (1) the redemption and

cancellation of the Goldman stock was the main purpose of the settlement

agreement, and the “correct operation” of a “normal” redemption and cancellation

is that the percentage of ownership of the remaining shareholders increases

                                         -6-
proportionally, Aplt. Br. at 20; (2) the 12.67% figure in ¶ 3.3.2, inserted by

opposing counsel during the exchange of drafts of the settlement agreement, is a

scrivener’s error constituting a mutual mistake that merits reformation of the

parties’ agreement; (3) the ESOP is a “trust and separate legal entity” and was not

a signatory to the settlement agreement, so it cannot be forced to “divest” its

shares, which is the practical result of giving effect to the 12.67% figure, id.

at 13; (4) the ESOP’s stock is specifically excepted from the terms of the

settlement agreement by ¶ 3.6.7; and (5) the stock certificates, which support

appellants’ position regarding the number of shares owned by Meredith, Nancy,

and the ESOP, are prima facie evidence of ownership.

      We are not persuaded by any of these arguments. First, while we might

agree in theory that the “correct operation” of a “normal” redemption and

cancellation of stock ordinarily results in an increase in the ownership of the

remaining shareholders when viewed as a percentage, the settlement agreement is

not a normal redemption and cancellation. The parties resolved a number of other

disputes, summarized above, and expressly agreed in writing to a different

percentage of ownership than might result from a “normal” redemption and

cancellation.

      Second, assuming it was appellees’ counsel who inserted the 12.67% figure

in an early draft of the settlement agreement, appellants have not met their burden

of proving that this was a scrivener’s error amounting to a mutual mistake of fact

                                          -7-
that justifies reformation. Under Oklahoma law, 3 “[m]utual mistake requires both

parties to labor under the same misconception as to the facts,” Hoobler v. Hanson

(In re Hoobler), 925 P.2d 13, 14 n.1 (Okla. 1996), and “[r]eformation corrects a

mistake between the written document and the actual intent of the contracting

parties,” Okla. Oncology & Hematology P.C. v. US Oncology, Inc., 160 P.3d 936,

947 n.22 (Okla. 2007). To prevail on a theory of mutual mistake, a party must

provide “clear and convincing evidence” that the contract “does not reflect what

either party intended.” Thompson v. Estate of Coffield, 894 P.2d 1065, 1067-68

(Okla. 1995). Here, the numerous drafts of the agreement contained in the record

show that Julian proposed many changes, including to ¶ 3.3, but no changes with

regard to the 12.67% figure of ¶ 3.3.2 contained in almost every draft. Nothing

indicates that appellees’ counsel inserted that figure based on a misconception

shared with appellants as to how the ownership of MRC’s voting common stock

would be allocated among Meredith, Nancy, and the ESOP after the parties settled

their disputes. Indeed, at the hearing, 4 Nancy testified that during the

3
       In the settlement agreement, the parties agreed that Oklahoma law governs
any disputes regarding the validity, construction, and enforcement of the
settlement agreement, so we apply the substantive law of Oklahoma. Cf. Yavuz v.
61 MM, Ltd., 465 F.3d 418, 428 (10th Cir. 2006) (“Absent special circumstances,
courts usually honor the parties’ [contractual] choice of law . . . .”) (quotation
omitted).
4
      Although the hearing occurred after the district court’s first order
concerning the ESOP’s ownership of MRC stock, the court still had pending
before it appellants’ motion to reconsider. Therefore, Nancy’s testimony is
                                                                       (continued...)

                                         -8-
negotiations leading up to the settlement agreement, Julian consistently

represented that she and Meredith would have total ownership of MRC, including

through stock held by the ESOP. See Aplee. Supp. App. at 151. This view is

supported by a statement of the parties’ intent in ¶ 3.2.1 of the settlement

agreement concerning the termination of Julian’s deferred annuity: that

“Meredith and Nan[cy] are to own 100% of the stock of MRC without any further

obligation to Julian.” Aplt. App., Vol. I at 49. Nancy also stated that a material

purpose of the settlement agreement was to restore Meredith and her to complete

ownership of MRC because Julian was asking them to forfeit their rights to the

income stream on $2 million worth of bonds in favor of Julian’s wife, Jeannie.

See Aplee. Supp. App. at 150. Accordingly, we conclude that appellants have not

provided clear and convincing proof that the 12.67% figure was a mutual mistake.

Any “mistake” as to the 12.67% figure stems from appellants’ failure to take issue

with that term of the agreement if they disagreed with it, not from a mutual

mistake.

      Next, although true that the ESOP was not a party to the settlement

agreement, we do not think appellants may rely on an allegation that the ESOP

was a trust and separate legal entity in order to avoid the effect of the settlement

agreement on the ESOP’s percentage of ownership of MRC’s voting common

4
 (...continued)
relevant to the assertion of mutual mistake.

                                          -9-
stock. The district court struck the only ESOP document—four pages of a plan

appellants claimed was fifty-eight pages in length, which they submitted during

summary judgment briefing—on the ground that appellants failed to disclose it

during discovery. Appellants have not contested this evidentiary ruling on

appeal. Thus, regardless of the parties’ apparent agreement that an ESOP existed,

there is simply no record proof regarding its legal status. Because of this, as well

as the fact that all individuals with any interest in MRC or the ESOP were

signatories to the settlement agreement, we conclude that appellants may not rely

on the fact that the ESOP was not a signatory in order to escape the consequences

of their agreement that the ESOP would own 12.67% of MRC’s voting common

stock.

         This conclusion is buttressed by the parties’ reference to the ESOP in

¶ 3.6.7 of the settlement agreement, which provides:

         Julian shall not, through any action (directly or indirectly) of Julian,
         permit Meredith and Nan[cy] as MRC’s current shareholders to at
         any time own, legally or beneficially, less than 100% of the
         aggregate interest of all classes of capital stock or equity interests of
         MRC and Meredith and Nan[cy] shall at all times own at least 100%
         of the aggregate interests of all classes of capital stock of MRC,
         except for any shares of stock owned by the MRC Employee Stock
         Ownership Plan.

Aplt. App., Vol. I at 52. By this provision, the parties asserted the ESOP’s

interest despite the fact that it was not a party to the agreement. But contrary to

appellants’ contention, the last clause of ¶ 3.6.7 does not “except” the ESOP’s

                                            -10-
shares from the terms of the settlement agreement such that the designation of

12.67% is ineffective. Rather, it merely states the obvious: that Meredith and

Nancy would not individually own any stock owned by the ESOP.

      Finally, appellants argue that the stock certificates of record show that of a

total of 13,107.41 shares, Meredith and Nancy each own 5,075.5 shares and the

ESOP owns 2,956.41 shares. Based on the stock certificates, appellants contend

that the ESOP owns 22.55%, and that the 12.67% in the settlement agreement is a

“mathematical impossibility.” Aplt. Br. at 17. We disagree. Under Oklahoma

law, “[a] stock certificate is but prima facie evidence of ownership in the person

to whom issued, and is not conclusive and the facts as to the true ownership may

be shown, unless estoppel prevents.” Davis v. Nat’l Bank of Tulsa, 353 P.2d 482,

486 (Okla. 1960) (quotation omitted). 5 Here, the settlement agreement sets out

ownership of MRC stock that conflicts with the stock certificates. As an express

agreement entered into by the parties after issuance of the stock, the agreement

constitutes contrary proof of ownership. Cf. Kirkpatrick v. Jacobson’s Lifetime

Bldgs., Inc., 467 P.2d 489, 490-91 (Okla. 1970) (concluding that evidence of

agreement to pay part of the purchase price of a house with stock was among

5
      Although appellants read Davis to require “substantial proof to the
contrary,” Aplt. Br. at 16, we fail to see such a directive in Davis or any other
case applying Oklahoma law. But even if it were a requirement, our conclusion
would remain the same.

                                        -11-
other ample evidence to rebut prima facie evidence of ownership by possession of

stock certificate). 6

       In sum, we conclude that according to the express terms of the settlement

agreement, the ESOP owns 12.67% of MRC’s voting common stock.

       B. The parties’ ownership of ESOP shares

       Appellants raise several arguments regarding the district court’s ruling that,

based on evidence of their compensation, Meredith, Nancy, and Julian each own

33.33% of the ESOP’s shares of MRC voting common stock and that

Ms. Permenter owns none. They first take issue with the district court’s

evidentiary ruling concerning an “allocation record” Julian had prepared. The

allocation record contained a summary of compensation for the years 1990-96 and

indicated the number of ESOP shares allocated to each of the parties in proportion

to compensation during the year of contribution: 49.74% to Julian; 11.21% to

Ms. Permenter; 19.52% to Meredith; and 19.52% to Nancy. 7 As to its genesis,

Julian testified:

6
       Appellants also argue that the stock certificates establish ownership of the
shares because appellees did not dispute Undisputed Fact No. 7 of appellants’
motion for summary judgment, which set out the date of contribution, stock
certificate number, and number of shares issued to the ESOP. We reject this
argument, as appellees responded they “have no knowledge or information
sufficient to admit or deny the allegations of” that fact. Aplt. App., Vol. IV
at 1004, ¶ 3.
7
       The parties appear to agree that ownership of the ESOP shares is
proportional to their compensation during the years in which MRC issued shares
to the ESOP.

                                         -12-
      It was prepared a long time ago. I don’t know exactly when it was
      prepared. We had it in the records of the ESOP, because we had to
      keep on an annual basis the records of how many shares were
      allocated to the participants, which was always proportionate to the
      compensation of the participants.

Aplee. Supp. App. at 59. Julian also stated that he discarded the underlying

compensation records for the years at issue because it was his practice to do so

once the statute of limitations under the Internal Revenue Code had run.

      The district court ruled that the allocation record was hearsay under Fed. R.

Evid. 801 and not within the exception to the hearsay rule for records of a

regularly conducted activity, Fed. R. Evid. 803(6), because Julian could not say

when it was prepared and because the circumstances of its preparation, including

the fact that there was no credible supporting evidence regarding compensation

claims for certain years, indicated a lack of trustworthiness. The court also noted

that Julian’s testimony regarding bonuses he received in 1990 and 1992 was

“flatly contradicted” by his earlier admission that from 1989 until 2002, he had

taken no salary or compensation from MRC other than $100 per month. Aplt.

App., Vol. IV at 1373 (citing to a memorandum Julian sent to Meredith and

Nancy in 2003 during negotiations leading up to the settlement agreement).

      We review evidentiary rulings for abuse of discretion. Abuan v. Level 3

Commc’ns, Inc., 353 F.3d 1158, 1171 (10th Cir. 2003). We conclude that the

district court did not abuse its discretion in excluding the allocation record as

hearsay. Contrary to appellants’ first contention, which unsurprisingly is

                                         -13-
supported by no case citation, the fact that Julian authored the document and

authenticated it by affidavit and testimony does not render it nonhearsay.

“‘Hearsay’ is a statement, other than one made by the declarant while testifying

at the trial or hearing, offered in evidence to prove the truth of the matter

asserted.” Fed. R. Evid. 801(c) (emphasis added). The allocation record fits

within this definition. It is a statement made by Julian, the declarant, other than

while testifying at the hearing; it was offered to prove the truth of the matter it

asserts; and it does not fall within any of the definitions of nonhearsay set out in

Rule 801(d). Consequently, it is hearsay.

      Moving to the district court’s ruling that the allocation record did not

qualify as a record of a regularly conducted activity excepted from the hearsay

rule under Rule 803(6), appellants focus on whether the allocation record was

“kept in the course of a regularly conducted business activity” and “made at or

near the time” of the events recorded, both requirements under the rule. But they

fail to address the court’s reliance on the rule’s exclusion of such records if “the

source of information or the method or circumstances of preparation indicate lack

of trustworthiness.” Fed. R. Evid. 803(6). Thus, even assuming that the

allocation record meets the other requirements of Rule 803(6), appellants have

waived any argument regarding the district court’s view that it lacked

                                          -14-
trustworthiness. See State Farm Fire & Cas. Co. v. Mhoon, 31 F.3d 979, 984 n.7

(10th Cir. 1994) (deeming waived issue not raised in opening brief). 8

      Appellants also argue that the district court’s reliance on Nancy’s testimony

regarding compensation was improper because the testimony lacked

foundation—Nancy admitted she had little or no knowledge of how MRC was

run, yet testified that she, Meredith, and Julian were paid a salary of $100 per

month for the years in question. Foundation requires a witness to have personal

knowledge of matters about which she testifies. See United States v. Nieto,

60 F.3d 1464, 1468 (10th Cir. 1995). Obviously, Nancy had personal knowledge

of her own compensation. With regard to Meredith’s compensation, the problem

with appellants’ argument is that the evidence they would have us consider

instead, the allocation record, shows that Meredith received $10,000 in 1990, and

$1,200 (i.e., $100 per month) in 1991, 1992, 1995, and 1996. 9 Since Nancy’s

testimony is essentially consistent with appellants’ own position, and appellants

have not advanced any argument or cited to any evidence that Meredith’s

8
       Appellants maintain that because appellees did not object to the allocation
record when it was presented with the counterclaim or to its admission at the
hearing, the facts it represents are deemed admitted. These arguments are clearly
belied by the record. In their reply to the counterclaim, appellees denied the
allegations contained in ¶ 9 of the counterclaim, which summarized the allocation
record, see Aplee. Supp. App. at 1 ¶ 8, and challenged the veracity of the
allocation record at the hearing during direct examination of Julian, see id.
at 58:22 to 61:6; 64:13-18.
9
      The allocation record does not show compensation for the years 1993 and
1994, apparently because no shares were issued to the ESOP in those years.

                                        -15-
compensation was less than $100 per month for the years in question, we think it

inequitable for appellants to now dispute Meredith’s compensation by challenging

the foundation of Nancy’s testimony. Finally, Nancy’s testimony that Julian

earned $100 per month for the years at issue was based on the admission Julian

made in the memorandum he sent to his daughters in 2003 that the court deemed

inconsistent with Julian’s claim to having received greater compensation. Thus,

foundation is not at issue with regard to Nancy’s personal knowledge of Julian’s

compensation, and contrary to appellants’ reply-brief contention, admissions of

party-opponents are not hearsay. See Fed. R. Evid. 801(d)(2). Thus, we see no

reversible error in the district court’s reliance on Nancy’s testimony.

         With regard to Ms. Permenter’s ownership of ESOP shares, the allocation

record is the only evidence of her compensation for the years in question. As we

have upheld the district court’s ruling that the allocation record is hearsay, and

appellants presented no other evidence of her compensation, we conclude the

court correctly determined that she was entitled to no percentage of the escrowed

funds.

         For their last point, appellants argue that together, Meredith and Nancy are

limited to no more than 50% of the escrowed funds because they never sought

more than that amount in any papers filed with the court until they filed a

supplemental brief just prior to the hearing on their ESOP ownership, when they

asked for 100%. We are not persuaded, as appellees prayed in their amended

                                           -16-
complaint for whatever additional legal or equitable relief they might be entitled

to.

      The judgment of the district court is AFFIRMED.

                                                    Entered for the Court

                                                    Neil M. Gorsuch
                                                    Circuit Judge

                                        -17-