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Parol evidence defines meaning of shareholder distribution in PSA

The trial court correctly determined that the term “shareholder distributions” in the parties’ property settlement agreement was ambiguous.

The court permissibly considered parol evidence to conclude that the term meant distributions from corporate income to wife rather than what the corporation’s board decided the distribution should be.

Introduction

Wife had a majority interest in PMAT, a Virginia corporation. Husband held a minority interest. In their divorce case, the PSA provided that husband would buy wife’s interest. The buyout provided husband with 85 percent of PMAT’s stock.

The agreement provided that wife was to receive “2019 shareholder distributions” and that she would be removed as PMAT’s director.

“[W]ife received the 2019 Schedule K-1 tax form from PMAT. The K-1 form reported that wife’s share of the corporate income for 2019 was $287,895.3 Wife did not receive a distribution check for the K-1 amount or any other amount.

“Instead, after she asked PMAT for her distribution, PMAT provided wife with an accounting, indicating it had charged $110,744 against wife for amounts owed to PMAT. The PMAT board met and voted to issue formal shareholder distributions to ‘true up’ what had already been paid or advanced to shareholders. Thus, for 2019, PMAT ‘distributed’ to wife the $110,744 that had already been paid out. …

“[W]ife filed a petition to show cause, alleging that husband had failed to comply with the terms of the PSA. Specifically, she argued that PMAT was required to pay her $287,895, her share of PMAT’s income as listed in the K-1, as her 2019 shareholder distribution.

“She contended that husband, as the controlling shareholder of PMAT, could not blame the company and its board for the lower distribution.”

At a show cause hearing, husband “argued that the term ‘2019 shareholder distributions’ in the PSA meant that wife was entitled to the shareholder distribution as decided on by PMAT’s board, not to her full share of corporate income.

“He pointed out that distributions and corporate income, particularly in these types of business structures, are two distinct concepts.”

The court found the term “2019 shareholder distributions” was ambiguous and, over husband’s objection, heard parol evidence from both husband and wife to determine the parties’ intent.

“The circuit court ultimately concluded that husband violated the terms of the PSA. It found that ‘2019 shareholder distributions’ required husband to ‘effect a distribution of the K-1 earnings of the corporation.’

“The circuit court came to that conclusion ‘because that was [wife’s] most recent experience with respect to the amount of the distributions and because it simply defies logic that she would have bargained for a complete unknown, which is whatever PMAT decides to distribute that’s all she gets.’

“It expressly stated that it found that this interpretation was ‘everybody’s agreement.’ The circuit court ordered husband to pay wife $177,151, the difference between the $287,895 K-1 income and the $110,744 she already received.” Husband appealed.

Ambiguity

“We hold that the PSA is ambiguous on its face because the relevant provision of the PSA can be interpreted in more than one way. Paragraph 9 of the PSA provides, in relevant part, ‘Wife shall receive her 2019 shareholder distributions and shall be permitted to review the Company’s financial documentation for 2019.’ …

“Given the placement of ‘shareholder distributions’ within a paragraph relating to a corporation, it is objectively reasonable to interpret the provision as husband did in his brief: ‘a distribution of property (meaning money, securities, or any other property except stock in the corporation making the distribution) made by a corporation to a shareholder.’

“Shareholder distributions are determined by the board of the corporation, and distributions are not necessarily, though they can be, equivalent to the K-1 income attributed to the shareholders.

Wife “argues that the agreement requires her ‘shareholder distribution’ to be equal to her share of the K-1 income, consistent with past practices, rather than an arbitrary amount voted upon by the board. Wife’s interpretation of ‘shareholder distribution’ as relating to the K-1 income is objectively reasonable because ‘contracts must be considered as a whole “without giving emphasis to isolated terms.”’ …

“The ‘shareholder distribution’ provision grants wife the right ‘to review the Company’s financial documentation for 2019.’ This bargained-for right to review PMAT’s financial documentation strongly suggests an entitlement to a distribution in an amount not determined solely by the board’s unfettered discretion.

“If the distribution was solely at the discretion of the board, then wife would have no need to review the financial documents. …

“Furthermore, under husband’s interpretation, PMAT’s board could have decided not to make distributions. But the provision states that “[w]ife shall receive her 2019 shareholder distributions.” (Emphasis added.) …

“Because both husband’s and wife’s interpretations of the phrase ‘shareholder distributions’ are objectively reasonable, the language in the PSA is ambiguous.”

Parties’ intent

Husband “argues that the circuit court erred ‘by considering the intent of only one of the parties in order to ascertain [the PSA’s] meaning.’ Specifically, he argues that the circuit court erred by considering only wife’s subjective intent. We disagree.

“Although the circuit court did adopt wife’s understanding of the agreement, it also held that it was persuaded that it was ‘everybody’s agreement that she would get whatever her share of the K-1 income was.’ (Emphasis added.) The record supports that conclusion. …

“Simply because the circuit court found in favor of wife does not mean that it did not consider husband’s evidence. It was not ‘plainly wrong’ for the circuit court to conclude that the parties intended wife’s 2019 shareholder distribution to be equivalent to the K-1 income amount because the evidence supported that finding.”

Affirmed and remanded to determine the amount of attorney fees awarded to wife.

Spruill v. Spruill, Record No. 0936-21-1, July 12, 2022. CAV (AtLee) From the Circuit Court of the City of Norfolk (Hall) Jennifer L. Fuschetti for appellant. J. Roger Griffin Jr. for appellee. VLW 022-7-254, 11 pp. Unpublished opinion.

VLW 022-7-254

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