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Knop v. Knop

Supreme Court of Virginia

August 1, 2019



          PRESENT: Lemons, C.J., Goodwyn, McClanahan, Powell, Kelsey, and McCullough, JJ., and Koontz, S.J.



         Ticonderoga Farms is a family company that owns nearly 1, 000 acres of land in fast-growing Loudoun County. The shares in the company are owned by Peter J. Knop ("Father") and his three children. A dispute arose concerning what percentage of shares the children owned. The trial court concluded that -- although Mr. Knop intended to make gifts of stock to his children for estate planning purposes -- those gifts were never effectually made because they were never delivered to the children in the manner required by law. The trial court also rejected the children's estoppel argument. The children appeal from this ruling. For the reasons noted below, we agree with the trial court that the shares were never delivered to the children. Thus, under the law, the gifts were not completed. We further conclude that the trial court did not abuse its discretion in denying the children relief under equitable estoppel principles. Accordingly, we will affirm the judgment below.


         When Ticonderoga Farms was incorporated, in 1982, Father owned almost 80% of the company. His wife, Diana Knop, and the three children, Alexandra, Peter R.Q., and William ("the children"), who were minors at the time, owned the remaining shares. Following a divorce, Diana transferred her interests to her former husband. By 1987, due to contributions by then adult children at the formation of the company and later transfers by Father, the children each owned 9.08% for a total of 27.24% of the company. Father owned the remaining shares. The company's stock book contains stock certificate stubs showing that the children each have a 9.08% ownership interest in the company and that such shares have been delivered to the children.

         James Cummings, the accountant for Ticonderoga Farms, prepared the Virginia and federal income tax returns for the company for tax years 1989-2007. He also prepared the tax returns for Father and the children. He testified that Father instructed him to make gifts of stock equivalent to the maximum gift tax exclusion to the children to avoid estate taxes. Cummings testified that he followed Father's directions and prepared Schedule K-1s[1] for the shareholders. These K-1s reflected the children's increased ownership shares and Father's decreased ownership share. The K-1s were filed with the Virginia Department of Taxation and the IRS as part of the company's income tax returns. Cummings relied on these K-1s to prepare personal tax returns for Father and the children. Father and the children filed their personal returns based on these K-1s. Father offered similar testimony, acknowledging that he intended to convey shares to them.

         The forms filed with Ticonderoga's federal taxes show this rising percentage of ownership. Likewise, the forms filed in connection with Virginia taxes showed a rising percentage of ownership for the children and a decreasing ownership proportion for Father. By 2004, if the gifts were effective, the children's ownership interests in Ticonderoga had risen to a total of 44.061%, or 14.687% for each child. These ownership interests were recorded on the tax returns for that year. The federal tax returns, which were also filed with the Virginia returns, were signed under penalty of perjury.

         The children also introduced into evidence a variety of emails and corporate documents authored or signed by Father in which he acknowledged the transfers and the increases in the children's ownership interests. The ownership interests reflected in these emails and documents were consistent with the interests shown in the tax returns for the corresponding years. Compare Pl.'s Ex. 37 and Pl.'s Ex. 188A and B (1991 returns), with Pl.'s Ex. 47 and Pl.'s Ex. 198A (2001 return), with Pl.'s Ex. 77 and Pl.'s Ex. 201A and B (2004 returns). The intended gifts of shares, however, were never reflected in stock certificates. Father testified that he never prepared the stock certificates. No ledgers were produced showing transfers of the shares.

         Years later, Father decided to sell or give away some of the property to create a scenic easement. The children opposed this course of action. Under the then-existing corporate bylaws, the sale of company's real property required the approval of 90% of the ownership interests. To circumvent this requirement, Father asserted that the gifts he made to the children in the 1990s and early 2000s were not completed because he did not prepare and deliver stock certificates to the children. In other words, the children each owned the same interests they held in 1987, i.e., 9.08% of Ticonderoga each, for a total ownership share of 27.24%. Father claimed an ownership share of 72.76% of the company. Under the Virginia Stock Corporation Act, a shareholder owning more than two-thirds of a corporation can convert the corporation to another form. See Code § 13.1-722.11(A)(5). If Father's assertion was correct, this would allow Father to convert Ticonderoga from a corporation to an LLC under the Act. In early 2015, Father noticed a series of shareholder and board of directors meetings where, relying on his claim to own 72.76% of Ticonderoga, he voted-over the children's objections-to convert Ticonderoga to an LLC. The operating agreement Father drafted for the LLC gave him total control of the company, including the ability to transfer its land without the 90% shareholder approval required by the corporate bylaws.

         The children then filed a complaint in which they asked for a declaration that they each own 14.687% of Ticonderoga and that Father lacks the authority to sell Ticonderoga land without their consent. Following a bench trial, the trial court found that the children "did not testify or present any evidence that they recalled ever actually receiving a certificate, saw a certificate, or lost a certificate." App. 2456. The court also observed that the corporate stock book contains stubs indicating that there were 227 shares for each child out of a total of 2500 shares. The court noted that

At various times, all of the [children] and certainly the [father] were in a position to update the corporate records to reflect their appropriate ownership. They were, at a minimum, at times, all officers, at times directors, and [Peter R.Q. Knop] was actually the president for a number of years.
The defendant was always active in the company, but the disarray of the company records cannot fall completely to the defendant.

         The court credited the testimony of Mr. Cummings indicating that Father intended to give the children an ownership share greater than 9.08%. The court concluded that the children had failed to meet ...

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