Reference no: EM133282702

Coyle Vs. 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 Covle 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 earl March 1986, Schwartz had an automobile accident in which his passenger was seriously injured. Schwartz's passenger 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 actions in transporting an underage female, who was purportedly Schwartz's girlfriend, in a vehicle insured by American Scale.

As a result, Covle informed Schwartz that he no longer desired to be in a 50-50 shareholder relationship with him. Coyle told Schwartz that unless Schwartz agreed to transfer I 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 competition 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 Stockholders 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 Covle 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 Covle and filed suit against Coyle seeking to invalidate the buout 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 Coste'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 Schwart could be compelled to transfer his shares. Coyle appealed to the Kentucky Court of Appeals.

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