806 F.2d 829 (8th Cir. 1986), 85-2098, Grogan v. Garner

Docket Nº:85-2098.
Citation:806 F.2d 829
Party Name:Coy R. GROGAN and John Henson, Appellees, v. Frank J. GARNER, Jr., Appellant.
Case Date:December 08, 1986
Court:United States Courts of Appeals, Court of Appeals for the Eighth Circuit

Page 829

806 F.2d 829 (8th Cir. 1986)

Coy R. GROGAN and John Henson, Appellees,


Frank J. GARNER, Jr., Appellant.

No. 85-2098.

United States Court of Appeals, Eighth Circuit

December 8, 1986

Page 830

[Copyrighted Material Omitted]

Submitted June 9, 1986.

Rehearing Denied Jan. 20, 1987.

Page 831

Arthur H. Stoup, Kansas City, Mo., for appellant.

Thomas M. Franklin, Kansas City, Mo., for appellees.

Before LAY, Chief Judge, ARNOLD, Circuit Judge, and STROM, [*] District Judge.

LAY, Chief Judge.

Coy R. Grogan and John H. Henson brought this diversity action against Frank J. Garner, Jr., alleging that Garner committed common law fraud, breached his fiduciary duties, and violated Sec. 10(b) of the Securities Exchange Act of 1934. The suit arises from the sale by Garner of stock in STI-Kansas to North American Car Corporation (NACC). A jury returned a verdict for Grogan and Henson and awarded $249,000 actual damages on each of three counts as well as punitive damages of $24,900 on the fraud claim.

After the jury returned its verdict and the judgment was filed, Grogan and Henson filed a motion for an award of prejudgment interest on the judgment. Garner moved for a judgment notwithstanding the verdict or a new trial and to amend the judgment as duplicitous. The court 1 held that Grogan and Henson individually could receive no more than $249,000 in actual damages and $24,900 for punitive damages on the fraud claim but did not require the plaintiffs to elect the count upon which the judgment for actual damages was based. The court also awarded prejudgment interest only as to the Sec. 10(b) claim at nine percent per annum from April 17, 1979, to the date of the judgment. Garner appeals.


Our review of the record in the light most favorable to the verdict holder, Lowe v. E.I. Dupont deNemours Co., 802 F.2d 310, 311 (8th Cir.1986), reveals the following facts. STI-Missouri was a Missouri corporation established by Frank Garner, Jr., in 1976. Garner's son, Franklin III, originally was the sole stockholder and president of the corporation. The elder Garner eventually began working full-time for STI-Missouri, at which time his son relinquished all capital stock in the corporation to his father. In 1976, Garner invited both Grogan and Henson to join STI-Missouri as employees in return for 100 shares, approximately ten percent, of the company stock. Grogan and Henson accepted the offer and paid approximately $800 each for their shares. At the same time, several other individuals also became minority shareholders in the corporation. 2 Garner retained approximately fifty-five percent of STI-Missouri shares, and until the time the corporation was sold, he served as president and chief executive officer.

In 1977, Garner began investigating the possibility of forming a wheel shop to supply wheels for the railcars that STI-Missouri repaired and refurbished. Garner estimated that start-up costs would total 3.5 to 4 million dollars. However, he needed $50,000 immediately for a down payment on equipment and construction. Garner obtained the approval of STI-Missouri shareholders to have STI-Missouri borrow $100,000 so that funds could be loaned to STI-Kansas by STI-Missouri. 3 The STI-Kansas

Page 832

debt was carried as an account receivable on STI-Missouri's books, thereby enhancing the net worth of STI-Missouri.

In January, 1978, NACC expressed to Garner its interest in buying STI-Missouri's car shops, which by then were located in several states. After two and one-half months of negotiations, NACC discontinued its efforts to buy the company. At the same time, Garner was still attempting to raise working capital for STI-Kansas. He notified all STI-Missouri shareholders in May, 1978, that he would like to incorporate STI-Kansas and that shareholders of STI-Missouri could purchase one percent of STI-Kansas for $40,000, with STI-Missouri retaining twenty to thirty percent of STI-Kansas stock. All STI-Missouri shareholders, including Grogan and Henson, declined Garner's offer, and Garner did not further pursue this plan.

On October 10, 1978, Garner notified all shareholders of the annual STI-Missouri shareholders meeting. In his letter, Garner stated that the meeting was for the purpose of reviewing the company's financial position and discussing the status of the wheel shop and other subsidiary car shops. In the meantime, NACC had expressed renewed interest in purchasing STI-Missouri and its affiliates, including the wheel shop. On October 17, 1978, NACC presented Garner with a letter of intent to purchase STI-Missouri, a number of the car shops, and the wheel shop. The sale was subject to final approval of NACC's board of directors and all shareholders of the STI enterprise. Because he now had a firm offer from NACC, Garner testified, he contacted each STI-Missouri shareholder by telephone and urged him to attend the October 21 meeting. Both Grogan and Henson attended.

On September 26, 1978, approximately one month before the shareholders meeting, STI-Kansas was incorporated, with Garner as its sole shareholder. At the time of incorporation, STI-Kansas remained unfunded and indebted to STI-Missouri. Grogan and Henson both testified that they were unaware of either the incorporation or of Garner's status as sole stockholder. On September 30, Garner purchased 500 shares of STI-Kansas common stock for one dollar per share, and on October 17, he purchased another 170 shares at the same price. 4

Although Garner at one time had offered one percent of STI-Kansas for $40,000, he now determined, as reflected in a series of memos dated October 2, 1978, to distribute STI-Kansas stock to certain employees of the company in exchange for one dollar per share and an employment commitment. 5 These transactions were completed on November 17, 1978, after the October 21 meeting but before closing the sale to NACC.

The parties' versions of what happened at the October 21 meeting differ substantially. Grogan and Henson testified that Garner represented to the shareholders that the 2.3 million dollar offer from NACC included the purchase of all STI facilities, including STI-Kansas. 6 NACC's letter of

Page 833

intent which, according to Grogan and Henson, Garner never distributed, revealed that NACC offered to pay separately for STI-Kansas by a stock exchange and extended an employment offer to Garner. Ultimately, NACC swapped shares of its parent corporation, Tiger International, valued at over 2.5 million dollars, for shares of STI-Kansas. Grogan and Henson claim that they did not learn of the separate consideration tendered for STI-Kansas until 1983. Had they known of the full transaction, they claim, they would not have agreed to sell their stock to NACC.

Garner, on the other hand, presented evidence that he disclosed at the October 21 meeting that he was the sole shareholder in STI-Kansas and that he distributed NACC's letter of intent. He also testified that he offered both plaintiffs the opportunity to become employees of STI-Kansas, but both failed to pursue the offer. Garner and John Buffalo further testified that Grogan received and reviewed the sales agreement before the closing on December 28 and 29, 1978. Grogan denies this. Garner and others also testified that all STI shareholders received a memorandum dated December 4, 1978, which set out the separate consideration for STI-Kansas. The plaintiffs deny receiving this memo.

On December 28 and 29, 1978, NACC purchased both corporations. Grogan and Henson received approximately $230,000 in cash and notes for their STI-Missouri stock. Besides cash and notes, Garner received for his STI-Kansas shares Tiger International stock worth $1,700,460 and an employment contract with NACC. Tom Garner and Jim Buffalo, the other two STI-Missouri shareholders also holding stock in STI-Kansas, received Tiger International stock worth $215,730 and $203,040 respectively. The remaining seven STI-Kansas shareholders received Tiger International stock valued at $418,680. The total value of exchanged Tiger International stock was $2,537,910.


Grogan and Henson claim they were not advised before, during, or after the October 21 meeting (1) that the wheel shop had been incorporated in September, 1978; (2) that STI-Kansas stock was sold for one dollar per share and employment commitments; (3) that those purchasing STI-Kansas stock from Garner were handpicked employees and relatives; and (4) that NACC paid a separate consideration, by way of Tiger International stock worth over 2.5 million dollars, for STI-Kansas. They allege that Garner misrepresented to them that the proposal of sale included the full consideration for both STI-Missouri and STI-Kansas. They urge that they were at all times led to believe that STI-Kansas was a division of STI-Missouri and that their ten percent interest in STI-Missouri properly included a proportionate interest in the assets of STI-Kansas. They

Page 834

therefore argue that they were entitled to ten percent of the value of the Tiger International stock, based on their ten percent ownership of STI-Missouri. Grogan and Henson claim they were individually defrauded when Garner misrepresented the terms of NACC's offer, and that by his actions, Garner breached a fiduciary duty owed them and violated Sec. 10(b) of the Securities Exchange Act of 1934.

Garner appeals, citing numerous errors that we will attempt to summarize: (1) the plaintiffs had no standing to sue because any injury sustained was to the corporation, requiring a derivative action; (2) the plaintiffs failed to prove sufficient evidence to sustain their claims for liability and damages; (3) the trial court committed various errors in its jury instructions; (4) the trial court erred in refusing to allow certain expert testimony; (5) the trial court erred in granting a post-verdict award of prejudgment interest on the Sec. 10(b) claim; and...

To continue reading