Coyle v. Schwartz

American Scale Corporation, a closely held Kentucky corporation with its principal place of business in Louisville, Kentucky, was incorporated in February 1985 to engage in the sale and repair of industrial and commercial scales. Daniel Coyle was president and Steven Schwartz was vice president. They were the sole shareholders. At the time of incorporation, Coyle and Schwartz each received 200 shares of stock in exchange for their capital contributions of $10,000.

In early March 1986, Schwartz had an automobile accident in which his passenger was seriously injured. Schwartz's passen- ger filed suit against American Scale because it had provided insurance coverage on Schwartz's vehicle. Coyle became concerned that Schwartz's activities would expose American Scale to further liability. He was particularly displeased with Schwartz's ac- tions in transporting an underage female, who was purportedly Schwartz's girlfriend, in a vehicle insured by American Scale.

As a result, Coyle informed Schwartz that he no longer desired to be in a 50-50 shareholder with him. Coyle told Schwartz that unless Schwartz agreed to transfer 1 percent of his shares to Coyle, thereby permitting Coyle to assume majority control of American Scale, Coyle would either seek dissolution of American Scale or withdraw and begin operating a business in com- petition with American Scale. On March 21, 1986, Coyle and Schwartz executed a share-transfer agreement wherein Schwartz transferred 1 percent of his American Scale shares to Coyle. The agreement specifically stated that Coyle would thereafter own a 51 percent interest in American Scale, leaving Schwartz as owner of the remaining 49 percent of American Scale's shares.

About two years later, on August 25, 1988, Coyle and Schwartz made a buy-sell agreement that they titled "Stockholders' Cross-Purchase Agreement." The agreement provided for the repurchase of a shareholder's stock in the event of death, disability, or voluntary withdrawal of that shareholder. Specifically, the agreement stated that if Coyle or Schwartz died, or otherwise attempted to dispose of his shares, the other shareholder would have the right to purchase those shares. In addition, the agreement gave the majority shareholder an option to purchase all of the minority shareholder's stock at any time upon a 60-day written notice.

The agreement provided a stock-valuation method for determining a per share price in the event either of the provisions was triggered:

Unless altered as herein provided, for the purpose of determining the purchase price to be paid for the stock of a Stockholder, the fair market value of each share of stock shall be, as of August 25, 1988, $250.

The Stockholders shall redetermine the value of the stock within 60 days following the end of each fiscal year. If the Stockhold- ers fail to make the required annual redetermination of value for a particular year, the last previously recorded value shall control.

Over the course of the next 12 years, neither Coyle nor Schwartz attempted to revaluate the price of American Scale's shares as provided in the agreement. Hence, the initial buyout price of $250 per share was never changed.

In a letter dated November 20, 2000, Coyle informed Schwartz that he was exercising his option as majority shareholder to purchase Schwartz's stock for $250 per share. Schwartz refused to tender his shares to Coyle and filed suit against Coyle seeking to invalidate the buyout agreement. Schwartz argued that the shareholders had abandoned the agreement by not changing the buyout price for 12 years. Schwartz also argued that the buyout price was so low as to constitute a penalty. In response to Coyle's motion for summary judgment, the trial court ruled that the shareholders had not abandoned the agreement. However, the court agreed with Schwartz that forcing him to sell all of his stock at the price of $250 per share was a penalty and, therefore, unenforceable. The trial court ordered a current valuation of the stock be undertaken before Schwartz could be compelled to transfer his shares. Coyle appealed to the Kentucky Court of Appeals.

Johnson, Judge

In his appeal, Coyle argues that the trial court erred by finding that the stock-valuation provision was unenforceable as a penalty. While Coyle and Schwartz never revaluated the stock, this fact alone does not render the provision unenforceable.

Schwartz, as owner of 49% of American Scale's outstanding shares, had the right under the corporation's bylaws to call for a special meeting to revaluate the listed price of American Scale's shares. Schwartz has admitted in his deposition testimony that he never made such a request. Hence, by sitting on his rights for over 12 years, Schwartz took the risk that Coyle would ex- ercise the majority-purchase option at a time when the actual value of American Scale's shares was in excess of the $250 price originally listed in the stock-valuation provision. Schwartz is not entitled to have the courts rewrite the parties' agreement simply because he believes he is receiving the short end of the bargain. Accordingly, we reverse the trial court's finding that the stock-valuation provision listing a price of $250 per share was unenforceable.

The terms of the stock-valuation provision listed an original price of $250 per share. The provision further stated that the fair market value shall be $250 "unless altered as herein provided" via the "mutual agreement" revaluation method. Since the par- ties failed to revaluate the price of American Scale's shares, $250 is the "last recorded value" with respect to the price of the corporation's shares. Therefore, the majority-purchase option and the stock-valuation provision entitle Coyle to purchase all of Schwartz's stock at a price of $250 per share.

Finally, we address Schwartz's claim that the trial court erred by finding that Schwartz and Coyle did not abandon the stock-valuation provision of the cross-purchase agreement. Spe- cifically, Schwartz argues that by completely ignoring the cross- purchase agreement's requirement that both shareholders "shall re-determine the value of the stock within 60 days following the end of each fiscal year" and record the same, as well as their intention to revalue their shares in American Scale, Schwartz

and Coyle unequivocally acted in a manner inconsistent with the existence of the cross-purchase agreement.

We disagree and hold that the trial court did not err by find- ing that Coyle and Schwartz did not abandon their rights under the stock-valuation provision. A contract may be rescinded or discharged by acts or conduct of the parties inconsistent with the continued existence of the contract, and mutual assent to aban- don a contract may be inferred from the attendant circumstances and conduct of the parties. While as a general rule a contract will be treated as abandoned or rescinded where the acts and conduct of one party inconsistent with its existence are acquiesced in by the other party, to be sufficient the acts and conduct must be positive and unequivocal.

In the instant case, while Coyle and Schwartz never revalu- ated American Scale's stock in the years following the execu- tion of the cross-purchase agreement, this fact, standing alone, does not constitute "positive and unequivocal" acts which could lead to a finding of abandonment. The stock-valuation provision itself provided a default price for the stock in the event the par- ties failed to revaluate the shares. Therefore, Coyle and Schwartz contemplated that they might not always conduct a revaluation. Accordingly, the failure of Coyle and Schwartz to conduct an an- nual revaluation of American Scale's shares did not constitute an abandonment of the stock-valuation provision.

What are the fact, issue, application and conclusion ?