02 June 2006

setliff v adams important corporate law opinion issued by the 3rd circuit

this is a real crazy ruling, to us at least. we havent seen the original petition or any of the pleadings, all we have to go on is what judge elizabeth a pickett wrote in the 3rd circuit's opinion. elaine setliff is a local real estate broker and was hired as an agent by erma adams inc back in 1998. somewhere along the way someone got the bright idea to make ms setliff a shareholder of erma adams inc. they had a board of directors meeting which said that ms setliff would become a stockholder she only had to pay $10,000 for a 16.3 % stake.

resolution passed from the december 1998 erma adams inc board of director meeting minutes:

The motion was made and passed to change the status of officers and stockholders, amended by the three original three [sic] stockholders and owners of this Corporation. The ownership and stock is restructured to allow Elaine Setliff to become a partner in the corporation of Erma Adams, Inc [...] Elaine Setliff will be expected to buy stock in the amount of $10,000 to be paid over a period of 5 to 10 years.
ms setliff paid $1,000 towards the purchase of the stock in january 2000 then for some unexplained reason she left erma adams inc the next month. she filed her original suit on 26 april 2002 "seeking a judgment that she be recognized as a shareholder of Erma Adams, Inc" eventually ms adams won a summary judgement. ninth judicial district court judge john c davidson granted ms adams summary judgement: and "...awarded $1,000.00 to Mrs. Setliff as the return of the deposit she made for the purchase of the stock, and otherwise dismissed Mrs. Setliff’s claims with prejudice."

ms setliff appealed that judgement her assignment of error stated that "The trial court judge erred in ruling that Elaine Setliff had no ownership interest in Erma Adams, Inc."

it would seem pretty obvious that she did have some kind of ownership interest since she did pay $1,000 towards stock, she served as its secretary according to the corporate minutes and erma adams inc took out a life insurance policy on ms setliff. if erma adams didnt think that she was a stockholder and not entitled to any shares of stock till the $10,000 was paid in full why not wait until then to take out the life insurance policy? that should have been looked into as well in that had ms setliff died would erma adams have kept the face amount of the insurance despite ms setliffs possibly not having paid in full yet or would ms setliffs survivor mark setliff received the overage? probably not since he signed a paper stating that he had no interest in erma adams inc.

however the third circuit ruled that:
The critical element missing from Mrs. Setliff’s case is any evidence of a plan to allow for the issuance of shares to her before she paid for them. Furthermore, there is no evidence that any stock was ever actually issued to Mrs. Setliff. In fact, the only evidence in the record on this point is an affidavit from C. Michael Adams stating that no stock was ever issued to Mrs. Setliff. While Mrs. Setliff took part in board meetings, she never properly paid for shares, and no shares were ever issued to her.
so we guess the moral of the story is to get your actual stock certificate issued and in your name as well as make sure that a payment plan is written down and how your ownership interest will accrue if at all as you pay in your money.. shareholder meetings and resolutions etc arent worth the paper they are written on.

the lord works in mysterious ways and it might be just as well ms setliff lost her appeal as a check of erma adams inc from the secretary of state's website shows that it is not in good standing.

edited 2:17 pm cdt sat 03 june 2006