Virginia Lawyers Weekly VA Lawyers Weekly
Even though a father intended to give his children stock in the family business and filed tax documents showing his decreasing share ownership and a corresponding increase for his children, the gifts were ineffective because he never gave them the stock certificates.
As a result, when the children later opposed their father’s efforts to sell or give away some of the business property, they lacked the necessary corporate control to do so.
Overview
Ticonderoga Farms is a family business owned by Peter Knop and his three children. The children own 27.24 percent of the shares. Knop owns 72.76 percent. Knop announced his intention to gift additional stock to his children. He instructed his accountant, who prepared the family’s tax returns, to make the gifts equal to the maximum gift tax exclusion.
The accountant prepared annual tax documents showing increasing shares for the children and decreasing shares for Knop. By 2004, if the gifts were effective, the children would have owned 44 percent of the business.
There was evidence of emails and corporate documents in which Knop acknowledged the gifts, and which reflected the same distribution of shares as the tax documents. “The intended gifts of shares, however, were never reflected in stock certificates. [Knop] testified that he never prepared the stock certificates. No ledgers were produced showing transfers of the shares.”
Some years later, the children opposed Knop’s plan to give away or sell some of the farm property. The company’s by-laws required approval of 90 percent of the ownership interests. Virginia law permits a two-thirds ownership interest to convert a corporation to another form.
Knop declared that the gifts to his children were invalid because he never gave them the stock certificates. He then notified them that because he owned more than two-thirds of the business, he would seek to convert it to an LLC, which would have an operating agreement that gave him total control, including the ability to transfer land without 90 percent shareholder approval.
The children sued for a declaration that they were 44 percent shareholders and that their father lacked the authority to transfer property without their consent.
The trial court heard testimony that the stock certificates were never delivered. The court also noted that the corporate stock book showed each of the three children owned 227 shares from a total of 2,500 and ruled there was no inter vivos gift of shares. On the children’s motion for reconsideration, the court also rejected arguments that under either equitable estoppel or quasi-estoppel, their father could not deny the gifts.
The children appealed.
Analysis
“Under Virginia law, an inter vivos gift is complete where (1) there is donative intent at the time of the gift and (2) there is ‘such actual or constructive delivery as divests the donor of all dominion and control over the property and invests it in [the] donee.’”
In this case, the trial court found donative intent, so the issue is “whether he delivered the shares or can be estopped from denying that he gave the shares.”
Under both statute and case law, delivery of a “certificated security” occurs when on “acquires possession of the security certificate.”
The children argue that even if there was no actual delivery, constructive delivery occurred as evidenced by the tax returns reflecting transfers of ownership interests.
“However, a statement on a tax return reflecting a gift of shares does not constitute a relinquishment of control of certificated shares by the donor. Statements on tax returns are made for purposes of assessing taxes. False or misleading statements may subject the person who makes them to civil or criminal penalties. Such statements, however, do not relinquish control of property. Statements made on a tax return do not, therefore, satisfy the element of delivery.”
As to estoppel, “the children offered no evidence that they suffered any detriment from the statements in the tax returns that reflect a higher percentage of ownership by the children.”
Quasi-estoppel has been described as “‘essentially a last-gasp theory under which a defendant who can point to no specific detrimental reliance … may still assert that [another party is] estopped from asserting allegedly contrary positions where it would be unconscionable for them to do so.’ … For the last four hundred years, quasi-estoppel has been a stranger to Virginia law. We decline to incorporate this amorphous, nebulous theory into Virginia law.”
Affirmed.
Knop, et al. v. Knop, et al. Record No. 180329 (McCullough) Aug. 1, 2019 (Appeal from Loudon Circuit Court). David Carl Rohrbach, Roy Richard Shannon Jr. for Appellant, Michael Sterling Dingman, Nicholas Vincent Albu for Appellee. VLW 019-6-054, 11 pp.
