Signatures Matter in the World of Business Succession Planning

A recent decision from a Texas appeals court serves as a reminder to small business owners that it is vital to follow through and sign a buy-sell agreement. Even though we live in the 21st century where emails and text messages dominate communication, there is often no substitute in the law for a piece of paper with a signature on it. The Texas case of Selzer v. Dunn issued by the Texas Court of Appeals is a perfect example.

In Selzer v. Dunn, Mr. Dunn and Mr. Varner each owned 50% of Cleanline Products, Inc. Mr. Dunn and Mr. Varner apparently had enough advice from their insurance advisors to know that they ought to have ownership of a life insurance policy on each other. In fact, they each owned a $2,000,000.00 life insurance policy on the other business partner. Varner’s policy stated that Dunn was the beneficiary and vice versa. Their company paid the premiums on both policies. Mr. Varner died in 2010. The administrator of his estate claimed the insurance policy proceeds. In response, Dunn filed a lawsuit seeking a ruling that would declare him to be the sole beneficiary of the policy proceeds. Dunn won at the trial court level and the decision was appealed by Varner’s administrator (his girlfriend, Tracey Selzer).

The court held that there was simply no way for Selzer to get around the fact that Dunn and Varner never signed an agreement that would obligate the survivor to use the life insurance policy proceeds to purchase the shares from the estate of the dying co-owner. There was talk about it. There were discussions about it. Their advisors even gave them ideas about a Cross Purchase Buy-Sell Agreement. There was evidence introduced at trial that Dunn and Varner may have verbally discussed the number of shares the surviving partner might be obligated to purchase but the price was never discussed, let alone agreed upon, even verbally. The court’s decision states, “they discussed ‘trying to do a buy-sell agreement,’ but Dunn ‘never could get [Varner] to agree to anything.’”

The administrator of Varner’s estate, Selzer, argued that an oral contract had been formed. But, the Court ruled that there was never a “meeting of the minds” on the important aspects of the Buy-Sell Agreement (i.e., price to be paid for the dying partner’s shares, how many shares would the surviving partner be obligated to purchase).

The result: the surviving business partner, Dunn, has $2,000,000 in cash but no obligation to use the money to buy the shares of Cleanline from Varner’s estate. And Varner’s heirs will each own less than a 50% ownership interest in Cleanline. The terms of a deal under which they can “cash out” will have to be worked out later, if ever.

What about the company’s lawyer? Should the lawyer have done something here to get the buy-sell agreement completed? The court’s decision states that Varner and Dunn, “never told their attorney any terms to include in a buy/sell agreement, but [the lawyer] produced some drafts as examples for them to consider.” Close, but no cigar.

If a business owner thinks it is important enough to take the time to submit to a medical exam and sign all the other life insurance paperwork to obtain the life insurance, why not take the last step and actually sign a binding buy-sell agreement? Some people are just too busy for that I suppose.

For the PDF, click here.

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  • About the Author

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    Edward D. Bender

    Ed practices primarily in the areas of estate planning, taxation and estate & trust administration. The estate planning area commonly includes planning for business owners, and Ed counsels them on their succession planning issues as well as their general corporate matters.

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