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YOUNG ET AL. v. KAYE (06/28/71)

decided: June 28, 1971.


Appeal from decree of Court of Common Pleas of McKean County, Feb. T., 1968, No. 2, in case of Fred W. Young, Mercedes Young an incompetent, by Security Peoples Trust Company, her guardian, v. John A. Kaye, Melvin J. Brooks et al.


John C. Bane, Jr., with him Roger C. Wiegand, and Reed, Smith, Shaw & McClay, for appellants.

Philip F. Jacobus, for appellees.

Anthony H. Chambers, with him Chambers & Crisman, for appellees.

Bell, C. J., Jones, Cohen, Eagen, O'Brien, Roberts and Pomeroy, JJ. Opinion by Mr. Justice Roberts. Mr. Chief Justice Bell concurs in the result. Mr. Justice Cohen took no part in the decision of this case.

Author: Roberts

[ 443 Pa. Page 337]

This appeal arises out of an action in equity in the Court of Common Pleas of McKean County to quiet title to 10,000 shares of stock of the Kinzua Oil and Gas Corporation, suit having been brought by appellants Fred Young and the guardian of his wife Mercedes.

It is conceded by all that the Youngs owned the stock in question until late 1966 or early 1967, at which time Fred Young on his own behalf and on behalf of his wife Mercedes caused to be executed a certificate for the 10,000 shares registered in the name of appellee Melvin Brooks. In December of that year, Brooks sold the same stock to appellee Traner Associates and Company for the sum of $50,000.

The two issues posed by this appeal are whether the stock transfer from the Youngs to Brooks is voidable because of a confidential relationship between Brooks and Young and, if so, whether Traner Associates nevertheless holds good title to the stock by virtue of the circumstances in which it acquired the stock from Brooks. Having reviewed this voluminous record, we hold that the Young-Brooks transfer is voidable and that the Youngs have a claim to the stock superior to that of Traner Associates.

I. The Young-Brooks Transfer

Kinzua Oil and Gas Corporation, a Pennsylvania Corporation with a registered office in Erie, Pennsylvania and a general business office in Bradford, Pennsylvania, was incorporated in 1942 by Arthur Stone Dewing of Newton, Massachusetts, Charles C. Davis of Kane, Pennsylvania, and appellant Fred Young. The authorized capital stock of the corporation was and is 10,000 shares of common stock, all of which were issued initially to Dewing and members of his family,

[ 443 Pa. Page 338]

    except for one share each to the other two incorporators. On or about July 19, 1960, the Dewing family sold its entire interest in Kinzua, 9,998 shares, to Fred and Mercedes Young for $10,000. At approximately the same time Arthur Dewing resigned as president of Kinzua, and Fred Young assumed that office as well as the office of treasurer. Although a man of sound mind, Fred Young was then in his seventies.

Primarily a holding company, Kinzua's principal asset is 1143 of the 1500 authorized and outstanding shares of the preferred stock of Kane Gas, Light and Heating Company, a public utility corporation supplying natural gas to the public in and around Kane, Pennsylvania. Because of certain defaults in the payment of dividends on the Kane Gas preferred stock, Kinzua has voting control of Kane Gas. From 1960 to 1967, Fred Young was president of Kane Gas as well as Kinzua, and both companies shared common offices in Kane, Pennsylvania.

Prior to his association with Fred Young and apparently unknown to Young, appellee Brooks had been convicted of the federal crime of stealing checks from the mail entrusted to his custody as a United States mail carrier. Beginning in 1962, he entered the employ of Kane Gas on a part-time basis as an accountant and "tax consultant" and in these capacities assisted and advised George Lupfer, the assistant treasurer of Kane Gas, in preparing the consolidated federal income tax returns for Kane Gas and its subsidiaries. In addition Brooks did much of the accounting and all of the federal tax work for Kinzua from 1962 until late in 1967, throughout which period he had free access to all of Kinzua's books, records, minute books, stock records and files.

Until the present controversy Young considered Brooks a friend and trustworthy advisor in tax and accounting

[ 443 Pa. Page 339]

    matters. The trust and confidence placed in Brooks is exemplified by his practice of routinely preparing and submitting letters, income tax returns, financial statements and various other papers which Young relied upon and signed without question. In addition to corporate business, Brooks also frequently consulted with Young about Young's personal tax problems, and the latter often relied and acted upon the information so obtained.

The specific series of events giving rise to the present appeal was precipitated initially by an agent of the Internal Revenue Service named Dushaw who appeared at the common offices of Kinzua and Kane Gas late in 1966 with authority to audit the financial records underlying the federal tax returns of both corporations. Under instructions from Young, Brooks worked very closely with Dushaw for the ensuing several months, and on March 13, 1967, after the conclusion of the tax audit, the Internal Revenue Service District Director issued a deficiency assessment against Kinzua for $11,814.63, a sum representing additional income tax allegedly owed by Kinzua for the year 1960. According to Brooks, Dushaw informed him in the course of one of their private meetings that similar assessments would probably be levied against Kinzua for the years 1961-1967 and that the holder of record of the Kinzua stock at the date of any assessment against Kinzua would be personally liable to pay that particular assessment.

Brooks related this information to Young and, according to Young, advised him that the assessment against Kinzua could be successfully defeated by placing the Kinzua stock in the name of a nominee "for tax purposes only." Young testified further ...

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