C OURT
OF
C HANCERY
OF THE
S TATE
OF
DELAWARE
L EO E. S TRINE, JR .
COURT H O U S E
W ILMINGTON ,
VICECHANCELLOR
D ELAWARE
I
9801
February 29,200O
H. Alfred Tarrant, Jr., Esquire
Gregory J. Weinig, Esquire
Thomas D. Shellenberger, Esquire
Coach and Taylor
824 Market Street, Suite 100
P.O. Box 1680
Wilmington, DE 19899
David J. Ferry, Jr., Esquire
Rick S. Miller, Esquire
Ferry & Joseph
824 Market Street, Suite 904
P.O. Box 1351
Wilmington, DE 19899
RE:
Edward S. Morente. III v. June F. Morente and Jacob Morente,
C.A. No. 16763
Dear Counsel:
This opinion addresses the attempt by the plaintiff, Edward M.
Morente, III (“Edward”), to obtain a judicial determination that he engaged
in a “sham” transaction on September 20, 1990.’ In that transaction, Edward
executed and delivered a stock certificate to his son, defendant Jacob
Morente (“Jacob”), certifying that Jacob was the owner of fifty shares of
Morente v. Morente, CA. No. 16763
February 29,200O
Page 2
Brandywine Flowers, Inc. Edward claims to have been the president,
director, and sole owner of Brandywine Flowers at the time he signed and
delivered the stock certificate to Jacob. The stock certificate was also signed
by Edward’s then-wife and Jacob’s mother, defendant June F. Morente
(“June”), as the treasurer and secretary of Brandywine Flowers. June was
also the only other director of the company at that time.
Regrettably, during the years after the certificate transfer, the marital
union of Edward and June was sundered. Apparently, their domestic
difficulties spilled over into the operation of Brandywine Flowers.
As a result, over eight years after Edward transferred fifty shares to
Jacob, Edward filed suit in this court seeking, among other things, a
declaration that Jacob does not own the fifty shares. The basis for Edward’s
claim is that the transfer to Jacob was a fiction designed to help Jacob secure
financing for the construction of a home by convincing lenders that Jacob
owned valuable assets, when Jacob, in fact, did not. Once the sham’s
purpose had been served, Jacob, according to Edward, promised to give back
or tear up the certificate but never did. Furthermore, Edward claims, Jacob
gave no consideration for the transfer of the shares, even though Jacob
Morente v. Morente, C.A. No. 16763
February 29,200O
Page 3
worked full-time for Brandywine Flowers and was being groomed by
Edward to take over the business.*
This controversy has important corporate control implications.
Brandywine Flowers has 250 authorized shares. The only shares any party
claims were issued were the fifty issued to Edward in the 1960s (and over
twenty-five of which June asserts ownership) and the fifty issued to Jacob in
1990 in the allegedly sham transaction. Thus the fifty shares transferred to
Jacob equals half of the issued stock of the company.
Jacob hotly contests Edward’s claims that the stock transfer was a
sham and that he gave no consideration to Brandywine Flowers in exchange
for the shares.3 Jacob admits, however, that these questions raise a dispute
of fact that must be resolved at trial.
Nonetheless, Jacob has brought a motion for summary judgment
alleging that Edward’s claim must be dismissed even if the stock transfer
was a sham. Because Edward knowingly participated in the allegedly
’ Edward has testified to both those facts. Moreover, Edward has submitted as evidence a hlstory
of Brandywine Flowers. In that history, it states, among other things: “After returning from
college in 1988, June and Ed’s son, Jacob, started working full-time in the business office of the
company. He concentrated on a strong use of computer applications and minimizing paper work.
In 1990, Ed and June made Jacob a limited partner in the business.” Defs. App. at B-2. The
history appears to have been prepared for Brandywine Flower’s customers, creditors, and
suppliers.
3 Jacob’s mother June supports his view that the transfer. was 111 all respects valid and
~I-O~CI-
Morente v. Morente, C.A. No. 16763
February 29,200O
Page 4
fraudulent stock transfer, he, according to Jacob, cannot now challenge it in
this court. Under the equitable doctrines of acquiescence and unclean hands,
Jacobs asserts, Edward is forbidden to seek the court’s aid in disavowing the
transaction.
Although the doctrinal basis for granting Jacob’s motion is less than
clear, I believe that a sound application of settled case law and equitable
principles dictates dismissal of Edward’s claim. In essence, Edward comes
here asking this court to enforce Jacob’s alleged promise to undo a
fraudulent transaction once that transaction had accomplished its illicit
purpose.
While Edward does claim that the transfer was infirm on technical
grounds, the evidence he submitted in support of that argument is
insubstantial. At the time of the transfer, Edward claims to have been the
sole stockholder and president of Brandywine Flowers. He admits that he
executed the certificate and gave it to Jacob.4 He admits that Jacob has
worked for Brandywine Flowers full-time for many years.5 Yet Edward
4 T&a v. Jarvis, Del. Ch., CA. No. 12847, mem. op., 1994 WL 30517, at *6 , Allen, C. (Jan. 12,
1994) (possession of a stock certificate is strong evidence of ownership).
’ Id. at *7 (service to the corporation, including that pre-dating the issuance of shares, is valid
consideration for the issuance of corporate shares).
,
r‘
Morente v. Morente, C.A. No. 16763
February 29,200O
Page 5
claims that the transfer was invalid because he himself failed to enter it on
the company’s stock ledger. But Edward admits that June and he comprised
the board of directors of Brandywine Flowers in 1990. Therefore, they had
the corporate authority to make the transfer that Edward concedes was made
to Jacob, and Edward’s failure to reflect the transfer in the company’s stock
ledger is but a makeweight defense!
But I need not and do not reach this issue. A venerable and unbroken
line of cases starting with Finch v. Warrior Cement Corp. holds that
“[alcquiescence and participation in an issuance of stock, without
consideration or for an insufficient consideration, will bar the right of the
assenting stockholder to complain against its issuance.“7 This same doctrine
prevents a party to the transfer from arguing that the transaction should be
set aside for failure to comply with corporate formalities, such as a failure to
secure formal approval by the board of directors.8 The Finch line of cases
6 Cj: 8 Del. C. $ 141(f).
7 Del. Ch., 141 A. 54, 61 (1928)., see also lbpkis v. Delaware Hardware Co., Del. Ch., 2 A.2d
114, 117 (1938); Bovay v. H.M. B~~lles/y & Co., Del. Ch., 22 A.2d 138, 141-42 (1941); Brown v.
Fcnin~or~, Del. Ch., C.A. No. 4097, 1977 WL 2566, at *3, Marvel, C. (Jan. 1 1, 1977); Danvir
Corp. v. Wall, Del. Ch., C.A. No. 8386, mm. op., 1987 WL 16507, at *4, Ikrgcr, V.C. (Sept. 8,
1987); Ttwn, 1994 WI_ 30517, at *s.
8 I~mvir, 10x7 WL 10507, al +s
Morente v. Morente, C.A. No. 16763
February 29,200O
Page 6
precludes Edward from challenging the validity of his own act in
transferring fifty shares to Jacob.g
1’
.
T so ruung, IT reject Edward’s argument that he cannot be said to have
m
acquiesced in the original transaction because a material element of that
transaction was Jacob’s supposed agreement to rescind it once the sham had
accomplished its illicit purpose. Edward is correct that acquiescence
typically arises when a party complaining about a transaction has given the
other party reason to believe that the transaction has been accepted by him.”
At this stage, I must accept as true that Edward did not assent to Jacob’s
retention of the certificate because Jacob had agreed to return or destroy it
once the sham had worked its magic.*’ But I see no exception in the Finch
9 Edward argues that he cannot be estopped from challenging the transfer because Jacob could not
have detrimentally relied on a transfer that Jacob (I must assume at this stage of the case)
promised to undo. Because detrimental reliance is an element of equitable estoppel, Burge v.
Fide& Bond & Mortgage Co., Del. Supr., 648 A.2d 4 14,420 (1994), and Jacob cannot satisfy
that element, Edward contends that summary judgment cannot be granted. But then Vice
Chancellor, now Justice, Berger dealt with precisely that argument in the Dunvir case and
rejected it on the basis of the “time honored principle that, ‘[e]quity will not hear a complainant
stultify himself by complaining against acts in which he participated . . .“’ Danvir, 1987 WL
16507, at *5 (quofing Gottfieh v. A4cKee, Del. Ch., 107 A.2d 240, 244 (1954)). Put another way,
the rationale for this line of cases does not depend on a showing of detrimental reliance; it hinges
on the fact that a plaintiff should not be permitted to participate knowingly in acts and then come
into court to deny them later when it is to the plaintiffs personal advantage.
lo Donald J. Wolfe, Jr. 6r Michael A. Pittenger, Corporate and Cornrncrcial Practice in the
Delaware Court of Chancery 4 1 l-3, at 760 (1998).
” Jacob has not argued that Edward’s decision to bring this suit eight years after the transfer
constituted such a period of inactivity as to lead Jacob to belicvc that Edward had accepted the
transfer a5 [,Cl-JllilJlCll~ 3Jld VZIild. .%Y’ i d .
Morente v. Morente, C.A. No. 16763
February 29,200O
Page 7
line of cases that enables a participant in a stock transfer to challenge that
transfer at a later time so long as the participant claims that the transferor
and the transferee effected the transfer as a purposeful fraud on third parties.
And the utility of creating an exception to a venerable and consistently
applied doctrine for self-confessed frauds is not discernible.
Moreover, even if Edward is correct and he cannot be said to have
“acquiesced” under Finch and its progeny, the doctrine of unclean hands
bars relief for him. As former Vice Chancellor Brown well stated:
[T]he purpose of the clean hands maxim is to protect the public
and the court against misuse by one who, because of his
conduct, has forfeited his right to have the court consider his
claims, regardless of their merit.12
Here, Edward seeks to have this court enforce Jacob’s alleged promise
to rescind the “sham transaction” after that transaction had its intended
improper effect. Thus Edward wants this court to believe that he - a person
who has admitted to having been dishonest in connection with the stock
transfer _ is now telling the truth about the transfer - and to use the power
entrusted it by the people of Delaware to compel specific performance of an
aspect of an illegal contract.
Morente v. Morente, C.A. No. 16763
February 29,200O
Page 8
The unclean hands doctrine is a flexible one, which will not lightly be
invoked when the party asserting the defense was not the victim of the
plaintiffs inequitable behavior.13 But, at bottom, the unclean hands doctrine
is a “rule of public policy” and “not a matter of defense to be applied on
behalf of a litigant[.]“14 This court has the latitude to apply the doctrine to
avoid becoming complicit in a plaintiffs fraudulent act.” That flexibility is
appropriately used here to bar Edward from seeking to enforce Jacob’s
alleged promise to return the shares?
This is so even though this approach dictates the entry of judgment on
Jacob’s counterclaim seeking a declaration that the transfer was valid.
I3 Nakahara v. NS 1991 American Trust, Del. Ch., 718 A.2d 5 18, 523 (1998). Although there are
statements in case law that state this proposition in stronger terms, see, e.g., BodIey v. Jones, Del.
Supr., 59 A.2d 463,470 (1947), I do not read that case law as denying me the flexibility to apply
the doctrine to avoid implicating the court in a party’s improper behavior.
I4 Skoglund, 372 A.2d at 2 13; Nakahara, 7 18 A.2d at 522.
” See Nakahara, 7 18 A.2d at 522-23 (Delaware courts have wide latitude to apply the unclean
hands doctrine where necessary to serve the doctrine’s core purpose); see also Bishop v. Bishop,
257 F.2d 495, 500 (3d. Cir. 1958) (unclean hands doctrine is flexible and properly used to bar
relief to a litigant who committed fraud so as to aid her ex-husband in placing assets outside the
reach of another of the ex-husband’s former wives), cert. denied, 359 U.S. 914 (1959).
l6 The case of Derickon v. Deri&on, Del. Supr., 28 1 A.2d 487 (197 1), supports this conclusion.
In that case, Horace Derickson sought to undo a transaction in which title to certain land was
placed in the name of Horace’s brother Allen Derickson so as to keep Horace’s creditors from
placing a lien on the land. The Chancery Court later granted Horace’s request to impose an
equitable trust for his benefit upon a half-interest in the land. The Supreme Court reversed,
stating that “where a debtor purchases property which he causes to be conveyed to another for the
purpose of hindering and delaying creditors, he has unclean hands and is not entitled to relief in a
court of equity.” /d. at 488.
*
Morente v. Morente, C.A. No. 16763
February 29,200O
Page 9
Assuming (for purposes of this motion only) that Edward and Jacob are
equally blameworthy as co-conspirators in a fraudulent transfer, equity has a
simple answer to the problem: the court will leave the parties where it finds
them-l7
This is sensible public policy. Under this rule, a person thinking
about entering into a fraudulent transaction knows that he will be at the
mercy of his co-conspirator and unable to call upon the aid of the court.
Thus he should think twice before acting dishonestly and making himself
vulnerable to other persons with a professed willingness to engage in
deception. But when he does not, goes on to commit fraud, and later feels
aggrieved when one of his co-conspirators does not live up to her end of an
illicit bargain, public resources should not be expended and the integrity of
our courts should not be sullied in proceedings analogous to enforcing the
code of “honor among thieves.“”
I7 Morford v. Bellanca Aircrafi Corp., Del. Super., 67 A.2d 542, 547 (1949); Bishop, 257 F.2d at
501. I reject the argument that Edward, the older and supposedly wiser of the co-conspirators,
was somehow less culpable than his then mid-twenty-something son Jacob. Indeed, Edward has
admitted that the sham may have been his own idea.
‘* Bishop, 257 F.2d at 500 (court of equity will refuse “to be the abettor of iniquity” and will
require applicants for relief to “have acted fairly and without fraud or deceit as to the controversy
in issue”) (crtations and quotations omrttcd).
Morente v. Morente, C.A. No. 16763
February 29,200O
Page 10
For all the foregoing reasons, Jacob’s motion for summary judgment
is granted, and he is declared to be the owner of fifty shares of the
company’s stock. IT IS SO ORDERED.
cc:
oc:
Neil J. Levitsky, Esquire
Register in Chancery
