Gerken v. Ross (In re F. L. Ross Enterprises, Inc.)
Docket: Bankruptcy No. B-2-78-2746
Court: United States Bankruptcy Court, S.D. Ohio; March 19, 1982; Us Bankruptcy; United States Bankruptcy Court
Michael Gerken filed a Complaint to Reclaim Property on June 19, 1980, against F. L. Ross Enterprises, Inc., a Chapter XI debtor, concerning shares of Pro-Energy Services, Inc. which he claims are subject to an express trust requiring their re-transfer by Ross. The complaint was amended multiple times, adding new defendants and eventually dismissing some by agreement. Following a trial and submission of post-trial briefs, the Court is set to make a decision based on factual findings relevant to the case. The parties were involved in several business ventures, including J. T. Gerken Trucking, where Gerken held a 25% stake and served as secretary-treasurer, and Petroleum Purchasers Inc. (PPI), an oil brokerage where he owned a majority stake. PPI faced financial difficulties leading to its state court receivership in 1976 after a failed contract with Armco Steel. The relationships and operations of these enterprises are crucial to understanding the allegations in the complaint.
Debts in the receivership include a stipulated amount of $25,018.65 owed to Pro-Energy for oil deliveries made in late 1975 and early 1976. Although Pro-Energy filed a claim in state court, the only disbursements made were to the IRS. Olanco, a company partially owned by Gerken and Ross, was responsible for securing oil and gas leases and drilling operations for Pro-Energy, which funded these endeavors based on Olanco's cost estimates, bearing the risk of any underestimations. Olanco received three loans of $25,000 each from Pennzoil for well completion, some of which remain unpaid, although Gerken, likely personally liable, has never been pursued for repayment. Pro-Energy, organized to raise investor funds for drilling, operated as the general partner for numerous limited partnerships and managed the distribution of proceeds from oil and gas sales. Pro-Energy's income was primarily from oil sales to PPI, which owed Pro-Energy $25,018.65 at the time of its receivership, a debt later written off. Michael Wright provided a personal loan to cover this debt to ensure investor payouts. Understanding the ownership structure and transactions between these entities is crucial for addressing the complaint regarding the transfer of Pro-Energy stock from Gerken to Ross.
Gerken claims that he transferred his half ownership of Pro-Energy to Ross under an express trust agreement, whereby Ross was to hold the shares in trust for Gerken for at least six months. This arrangement was designed to allow Gerken time to resolve issues with PPI and re-establish his role as an acceptable owner to Pro-Energy's customers. Subsequently, Ross transferred the shares to F. L. Ross Enterprises, Inc., which later passed them to WNGC, Ohio Inc., a subsidiary of Western Natural Gas Co., involved in a Chapter XI Plan of Arrangement. Gerken seeks to reclaim 50% of the original Pro-Energy shares now held by WNGC, which reflects his initial transfer minus a 5% share given to Wright.
Ross denies the trust's existence and raises defenses including statute of limitations, estoppel, parol evidence, and laches. He also counters Gerken's claim with a breach of promise for unpaid oil and service debts from Pro-Energy. The court identifies key chronological facts leading to the stock transfer, noting that Gerken and Ross formed Pro-Energy and Olanco on December 24, 1974, each holding 50% of 500 shares. By May 1975, Ross was heavily involved in Pro-Energy's operations while Gerken held multiple executive roles across different companies.
A significant event occurred when both families traveled to Spain in October 1975, returning on October 24, which is relevant due to the backdating of corporate documents executed that day. This backdating was intended to mislead Pennzoil regarding Gerken's involvement with Pro-Energy amid PPI's financial difficulties. By late 1975, PPI was experiencing severe financial issues, leading Gerken to consider filing for state court receivership, which he initiated on February 3, 1976. During this period, Pro-Energy was owed $25,018.65, but payments were mishandled, impacting its financial stability. Ross and Gerken's private meeting at a motel/restaurant occurred between November 1975 and January 1976, further emphasizing the timeline of events surrounding the stock transfer.
Ross informed Gerken that they needed to part ways, leading Gerken to agree to sell his Pro-Energy shares to Ross for $150.00, a payment that was never made. Initially, Gerken required an agreement for Pro-Energy to sell all its oil to PPI but later retracted this demand. After learning about PPI's financial difficulties, Ross proposed to drop potential legal action against Gerken for fiduciary breaches related to oil purchases in exchange for Gerken’s Pro-Energy shares. The Court found Ross's testimony about these meetings largely unconvincing and irrelevant to the question of whether an express trust was established between them. The Court concluded that Ross's threat of legal action was not a genuine factor in their discussions and appeared to be a post-facto justification for the stock transfer.
Gerken consulted attorney David Pemberton regarding PPI’s financial issues, who advised him to seek another attorney for mutual assignments to resolve debts. Although mutual assignments occurred between Gerken Trucking, PPI, and Olanco, none were executed concerning Pro-Energy. The purpose of updating Pro-Energy’s and Olanco’s books was disputed; Gerken claimed it was merely to update records, while Ross suggested it was to address urgent issues in PPI’s receivership. On January 21, 1976, Gerken provided the minute books to Pemberton for this updating.
Later that evening, Ross visited Gerken at his home and communicated that customers, particularly Pennzoil, were unwilling to engage with Pro-Energy as long as Gerken was involved. Ross requested Gerken to transfer his stock to him for six months to a year, to which Gerken consented, signing documents to formalize this arrangement. Gerken asserted that the agreement stipulated Ross would hold the stock in trust until PPI’s issues were resolved, after which it would be returned to him or his designated individual. They also agreed that Ross would receive an annual salary of $18,000.00 for managing Pro-Energy, with profits above this amount split equally. In contrast, Ross claimed he was authorized to take a $50,000.00 salary by late 1976. Gerken stated he signed his resignation letters for Pro-Energy and Olanco on January 12, 1976, although they were dated October 24, 1975.
On January 23, 1976, new documents for the Pro-Energy corporate minute book were finalized by Pemberton, including backdated minutes and consent forms from 1974 and 1975. Gerken signed the stub for stock certificate 1 and all necessary documents, forwarding them to Ross while retaining stock certificate 1. The court determined several key points regarding the corporate documents:
1. **Corporate Documents**: The Articles of Incorporation and Appointment of Agent, prepared by Allen Blue, were dated December 24, 1974, and included in the minute book before January 21, 1976. Other documents, such as a $525 receipt dated February 19, 1976, a Secretary of State certificate dated February 18, 1976, and a Certificate of Amendment dated February 12, 1976, were not present in the book by January 21, 1976.
2. **Shareholder Minutes**: The Minutes of Actions of Sole Incorporator from December 24, 1974, were prepared later by Pemberton and backdated; they were not in the book as of January 21, 1976. Other documents, including the Consent and Authorization of Shareholders and actions related to Gerken's resignation, were also backdated and not included by that date. The actual signing dates and how some documents were entered into the book remain disputed.
3. **Other Documents**: The Code of Regulations was present in the book by January 21, 1976, having been prepared earlier by Blue. Several documents, including various entries in the Director Minutes and stock certificate specimens, were also backdated and not included in the minute book as of January 21, 1976. The preparation and signing dates of some documents remain unclear.
Overall, the court's findings highlight discrepancies in the dating and inclusion of various corporate documents, raising questions about their authenticity and proper documentation in the corporate minute book.
On January 21, 1976, the Minutes of Actions Taken in Writing Without a Meeting by the Directors of Pro-Energy Services, dated January 5, 1976, and the Actions by Written Consent of Director, dated January 5, 1976, were missing from the corporate book and were not prepared by Pemberton during the update of corporate records. The remaining actions documented in the corporate minute book and the Pro-Energy Services Executive Medical Care Plan occurred after the relevant dates of the present lawsuit. The Stock Ledger section had several pertinent entries, including a shareholder list that was also absent on January 21, 1976, and not prepared by either Pemberton or Blue.
Stock Certificate 1, issued to Michael Gerken for 250 shares, was missing from the records as of January 21, 1976, despite its original preparation by Pemberton. The admitted copy does not match the original, which Pemberton marked 'cancelled' after the stock was transferred to Ross on January 24, 1976. The transfer certificate for this stock was also absent on January 21, 1976. Stock Certificate 2, issued to Ross and prepared by Pemberton, had an incomplete stub that Pemberton did not recall seeing on January 21, 1976. Stock Certificate 3, showing shares issued to Ross from Gerken, was improperly dated and prepared in February 1976, not present in the book on January 21, 1976. Additional stock certificates and a compensation agreement dated January 1, 1977, are irrelevant to the current dispute.
Despite extensive testimony regarding the dates and preparation of these documents, much remains uncontested and may not be critical to the case's outcome. The Court notes the confusion surrounding these matters reflects the careless handling by Gerken and Ross, complicating the sequencing of events. The Court dismisses Ross's objection to the admission of testimony contradicting the document dates based on the parol evidence rule. Subsequently, Gerken communicated with Pemberton regarding transferring his Pro-Energy stock to Ross temporarily to appease Pennzoil, receiving advice to formalize this transfer through a written trust or buy-sell agreement or to have a blank endorsed transfer for control purposes in case of non-compliance.
On February 3, 1976, PPI filed for state court receivership. The next day, Gerken endorsed and witnessed Stock Certificate 1, backdating it to December 30, 1974, although it was executed on February 4, 1976. He sent the certificate and a memo to Pemberton’s secretary to transfer the stock to Ross with an endorsement stating the shares were being sold to Gerken and his brother. On February 5, 1976, Gerken received a call from Ross regarding an imminent Pennzoil audit, stressing the need for a resolution on the stock matter. Gerken informed Ross that the certificate had already been sent for transfer to him and his brother. Ross insisted on a "clean transfer" without the endorsement, which Gerken reluctantly agreed to, despite Pemberton's advice against it. This decision was made under the premise that Pro-Energy would be worthless without the Pennzoil contract, with an understanding that the stock would be retransferred to him after six months or upon his acceptance in the venture.
On the same day, Ross collected the amended certificate and Pro-Energy corporate minute book, after which Pemberton ceased to provide services for Pro-Energy. Secretary Margaret West testified that Ross became angry upon discovering the original transfer provision and that Pemberton later instructed her to destroy the initial certificate and create a new one without the transfer language. Although Ross claimed Pemberton urged him to sign the transfer back to Gerken and he refused, the situation illustrated Gerken's initial intent for a retransfer of the stock, which was ultimately omitted at Ross's insistence. Additionally, on February 18, 1976, attorney Blue amended Pro-Energy’s Articles to allow for the issuance of 10,000 shares. The origin of a purported copy of Certificate 1 found in evidence remains unexplained, and the minute books were not returned to Pemberton's office.
Michael Wright received a 10% ownership stake in Pro-Energy, with the other 90% transferred to Ross, a transfer that Gerken and Ross do not dispute. Gerken testified that he and Ross agreed in late 1975 to each give Wright 5% of their shares. On March 15, 1976, a stock certificate was prepared to formalize this transfer. In August 1976, Gerken discussed legal fees owed to Pemberton for services related to Pro-Energy and other companies and sought to address a potential stock retransfer due to new funding from Pennzoil. Ross, upon being contacted by Pemberton, agreed to pay Pemberton's fees but stated Gerken had no shares in Pro-Energy, suggesting that while he might pay something for any equitable interest Gerken had, no payment was ultimately made. Following this, Pemberton wrote to Gerken, relaying Ross's claims regarding Gerken's lack of ownership and asserting that Pemberton's involvement was limited to the Olanco transfer. In late 1976 or early 1977, with litigation seeming inevitable, Pemberton referred Gerken to another attorney. On July 29, 1978, Gerken filed a complaint against Ross concerning the stock transfer in Franklin County Common Pleas Court. The Court must resolve conflicting accounts of whether the shares were transferred under an express trust agreement or free of any claims by Gerken. After reviewing testimony and assessing credibility, the Court concluded that an express trust arrangement was established prior to the stock transfer, specifically on January 21, 1976, during a meeting between Ross and Gerken. The Court found clear evidence of intent to create a trust, interpreting the actions of both parties as indicative of a temporary arrangement concerning Gerken's Pro-Energy shares, with the understanding that they would be returned after sufficient time.
Gerken intended to transfer his Pro-Energy stock shares to Ross to hold in trust for him. Gerken had the capacity to establish the trust, which had clear terms and an identifiable subject matter, with himself as the intended beneficiary. The oral agreement for the trust was sufficient, initiated on January 21, 1976, and the stock transfer was executed on February 5, 1976. No consideration was required for this arrangement. However, Ross repudiated the trust in a letter dated August 25, 1976.
The court found that while the express trust agreement was established regarding the re-transfer of the 250 shares back to Gerken, there was ambiguity concerning an alleged agreement for Ross to be paid an annual salary of $18,000 and the division of net profits. Furthermore, the court acknowledged that Gerken and Ross consented to a 10% ownership interest in Pro-Energy given to Dr. Wright, which must be considered in any damages discussion.
Ross raised various defenses against the express trust, including a statute of limitations claim, statute of frauds, accord and satisfaction, the parol evidence rule, and other equitable doctrines. The court outlined key dates relevant for evaluating the statute of limitations regarding Gerken’s complaint, including the creation of the trust, the delivery of shares, the repudiation letter, and subsequent legal filings. Ross argued that several statutes of limitations barred Gerken's claims, specifically referencing Ohio Revised Code provisions for fraud, unlawful sales of securities, and oral contracts. In contrast, Gerken contended that the applicable statute was a six-year limit for contracts not in writing (Ohio Revised Code 2305.07).
Gerken's action is not barred by any statute of limitations. The four-year limitation in Ohio Revised Code § 2305.09 applies only to fraud-related actions, which do not form the basis of Gerken’s complaint. The two-year limitation in § 1707.43 pertains only to unlawful securities purchases, but this case only tangentially involves a security as a trust res, thus it doesn't apply. The Ohio Statute of Frauds (R.C. § 1335.05) is also not applicable, as trust agreements are not mentioned, and the trust was repudiated seven months post-creation, well within the one-year completion timeframe. The Court determines that the six-year statute of limitations on oral contracts is relevant, with Gerken’s claim stemming from a contract dated January 21, 1976, and the addition of Ross as a defendant on October 2, 1980, meaning the claim is not barred. Additionally, the initiation of a state court suit against Ross on July 29, 1978, could toll any applicable statute of limitations, potentially estopping Ross from using any unexpired limitations as a defense. The Joint Plan of Arrangement approved in the Chapter XI proceeding, which was agreed to by Fred Ross, included provisions for 200,000 shares of common stock related to Gerken’s claim, indicating Ross anticipated litigation over this claim. While agreeing to the Joint Plan does not waive Ross's defenses, it demonstrates an understanding that Gerken’s pending claim would be resolved in court. The Court finds no prejudice to Ross from resolving the matter in bankruptcy court despite the time elapsed since the state court filing. Ross also claims that Gerken transferred his Pro-Energy shares to him as satisfaction for the dispute regarding funds owed by PPI to Pro-Energy.
The Court has concluded that the obligation of PPI to Pro-Energy, amounting to $25,018.65, was not the reason for the stock transfer from Gerken to Ross. Although Ross attributed his losses to Gerken's actions related to PPI's non-payment of this debt, the Court found no evidence to support the claim that this debt influenced the stock exchange, as PPI is a separate entity from Gerken. Additionally, Ross’s counterclaim against Gerken was not substantiated, with no liability for any losses established against Gerken.
Ross's "clean hands" defense argues that Gerken's involvement in PPI's financial issues disqualifies him from reclaiming the Pro-Energy shares. However, the Court noted that Gerken does not need to prove his innocence to recover his shares, despite the possibility that the stock transfer was a tactic to mislead a major customer about Gerken's role in Pro-Energy. The Court found the existence of a trust agreement, ruling in favor of Gerken's request for remedies, which include establishing a constructive trust on shares held by Trustees for Ross, imposing an equitable lien on additional shares for a personal judgment against Ross, and seeking at least $250,000 plus legal fees. The Court specifically recognized that Ross holds 250 shares of Pro-Energy for Gerken's benefit, but declined to award money damages related to salaries or commissions earned by Ross, citing a lack of credible evidence on the shares' value at the time of transfer or Ross's repudiation of the trust agreement.
Pro-Energy's valuation has fluctuated, with Ross sometimes promoting its worth during attempts to sell limited partnership interests and at other times claiming it to be worthless. The value of Gerken's 250 shares is to be assessed based on their significance in the Joint Plan of Arrangement. Initially, these shares represented a 50% ownership in Pro-Energy, equal to Ross's shares. However, an agreement with Dr. Wright indicated that he should receive a 10% stake, reducing Ross's and Gerken's interests to 45% each. Following Gerken's share transfer, Ross expanded the number of authorized shares from 500 to 10,000, redistributing 9,000 shares to himself and 1,000 to Dr. Wright. Ross later transferred 80% of his remaining interest to F. L. Ross Enterprises, Inc. Gerken contends that his ownership should remain unaffected by these transactions, maintaining his original interest despite subsequent share dilution. The Joint Plan of Arrangement confirmed in the Chapter XI cases proposes that Western Natural Gas Company will acquire 90% of F. L. Ross Enterprises, Inc. from Ross for 200,000 shares valued at $3.00 per share, totaling $600,000. Ross is also entitled to receive additional shares based on the valuation of the Debtors' assets and liabilities, to be determined by agreed appraisal or independent geological study.
Should the present value of 90% of the Debtors' assets and reserves exceed $600,000, Ross is entitled to additional shares of Western Natural Gas Company common stock at a rate of one share for every $3 of excess value. If total liabilities exceed this asset value, no additional shares will be issued, nor will Ross have to return any shares. Ross will also have augmentation rights similar to Class A and Class C creditors based on the future value of Western Natural Gas Company stock.
The 200,000 shares designated for Fred L. Ross and Carolyn Ross will be held by a trustee from the official creditors' committee and distributed under specific conditions: if the augmentation rights are fulfilled before the third anniversary of issuance or if Class C creditors receive shares valued at 100% of their allowed claims by that date. If neither condition is met, the shares will be distributed pro-rata to Class C creditors.
Additionally, Ross must facilitate the transfer of Ohio Energy Resources' royalty interests to Western Natural Gas Company and assign his general partnership interests in several Cambridge programs. Ross is also required to obtain a release from Michael Gerken regarding his claim to half of the outstanding shares of F. L. Ross Enterprises, Inc. If Ross fails to secure this release prior to the plan's confirmation, Western Natural Gas Company must deposit sufficient shares with the Court to cover Gerken's claim, which the Court will then adjudicate. The extent of Gerken's claim on the originally held 45% ownership of Pro-Energy remains unclear to the Court.
No alternative measure of damages is recognized other than tracing the trust asset and ordering its turnover to the rightful owner. Gerken asserts that the asset consists of 45,000 shares of Western Natural Gas Company, derived from 200,000 shares held by a trustee per the joint plan. The principle established is that unauthorized disposition of trust property maintains the trust's claim to the asset unless the transferee is a bona fide purchaser for value. The tracing process allows for changes in the identity and enhancements of the trust property.
The trust res is identified as 250 shares of Pro-Energy stock transferred from Gerken to Ross in February 1976, representing a 50% ownership interest. Ross later increased the authorized shares to 10,000 and transferred a 10% interest to Michael Wright, reducing the trust res to 4,500 shares. Although the Pro-Energy shares were exchanged for F. L. Ross Enterprises, Inc. shares, the record lacks concrete evidence to determine the portion traceable to the 4,500 Pro-Energy shares.
According to the Joint Plan of Arrangement, Western Natural Gas Company will acquire Wright's 10% interest in Pro-Energy Services, Inc. for 10,000 shares of its common stock, establishing a conversion ratio of ten Pro-Energy shares to one Western share. Thus, the 4,500 Pro-Energy shares equate to 45,000 shares of Western stock. The Court rules that damages for Ross’s breach of trust will result in a constructive trust on 45,000 shares of Western Natural Gas Company, subject to the Joint Plan's terms. No other damages are recognized or awarded, and a judgment will be issued accordingly.
