Advanced Business Communications, Inc. v. Myers, 05-84-00037-CV

• Decision Date: 10 June 1985
• Docket Number: No. 05-84-00037-CV,05-84-00037-CV
• Parties: ADVANCED BUSINESS COMMUNICATIONS, INC., and John W. Israel, Appellants, v. John P. MYERS, and Merton F. Bernabi, Appellees.
• Court: Texas Court of Appeals

Page 601

695 S.W.2d 601

ADVANCED BUSINESS COMMUNICATIONS, INC., and John W. Israel, Appellants, v. John P. MYERS, and Merton F. Bernabi, Appellees.

No. 05-84-00037-CV.

Court of Appeals of Texas Dallas.

June 10, 1985.

Michael V. Powell, Raymond E. LaDriere, II, Rain, Harrell, Emery, Young & Doke, Dallas, for appellants.

Charles A. Gall, Thomas A. Albright, Jenkens & Gilchrist, Dallas, for appellees.

Before GUITTARD C.J., and CARVER and SHUMPERT, JJ.

GUITTARD, Chief Justice.

This suit was brought by a corporation and its principal stockholder against two former officers and stockholders. Plaintiffs alleged unauthorized withdrawals by defendants of corporate funds and fraudulent representations and breaches of warranty in connection with the formal agreement by which defendants sold certain stock to the individual plaintiff. Defendants moved for summary judgment on the ground that the corporation's claim is barred under the authority of Bangor Punta Operations, Inc. v. Bangor & Aroostook Ry. Co., 417 U.S. 703, 94 S.Ct. 2578, 41 L.Ed.2d 418 (1974), which holds that a corporation cannot recover from its former majority shareholder for mismanagement of the corporate affairs before the present majority stockholder acquired its stock. Defendants also asserted in their motion that the individual plaintiff cannot recover because he bought his stock in reliance on correct information and, therefore, sustained no damages as a matter of law. The trial court rendered summary judgment for defendants, and plaintiffs appeal, contending that the Bangor Punta doctrine does not apply and that the evidence fails to show that the individual plaintiff sustained no damages from the breach of warranty.

We hold that Bangor Punta applies, but only to the extent of the stock sold by defendants, and that the corporation may recover on behalf of the owners of the remaining shares. We also hold that the individual plaintiff may recover for breach of warranty with respect to the stock sold to him. Accordingly, we reverse the summary judgment and remand the cause for trial.

Facts

Before October 1981, plaintiff John W. Israel and defendant James P. Myers were the principal shareholders of plaintiff Advanced Business Communications, Inc. ("ABC"). Israel was chairman of the board and owned 48% of the stock. Defendant Myers was president. Defendant Myers, defendant Morton F. Bernabi, and Benjamin Laws owned 50% of the stock. ¹ The parties disagreed concerning the affairs of the corporation, and litigation ensued. In settlement of this litigation, the parties entered into a formal agreement dated October 23, 1981, whereby Myers, Bernabi, and Laws sold all of their 50% stock interest to Israel and Italtel S.I.T., an outside party, for $200,000. ² The 25% interest sold to Italtel was later acquired by ABC and has since been held as treasury stock, so that Israel now owns approximately 99% of the outstanding shares.

Besides the stock sale, the settlement agreement contains various releases, warranties, and other provisions. Myers, Bernabi, and Laws agreed to resign as officers, directors, and employees of ABC, to surrender all corporate records in their possession, and to disclose all encrypting passwords known to them applicable to any computer at ABC. The warranties now alleged to have been breached include the following:

10. Myers, Bernabi and Laws each hereby warrants, represents and covenants to Israel, and this Agreement is made in reliance on the following, each of which is deemed to be a separate covenant, representation and warranty, that at the time of this Agreement and as of the Closing:

* * *

* * * (c) Within the six (6) month period immediately preceding the Closing, ABC has engaged in no transactions with Myers, Bernabi or Laws, or the affiliates of any of them, or any member of any of their families or any organization with or in which any of them or any family member is associated or has a direct or indirect interest, except for the payment of salaries and reimbursement of reasonable business expenses, all of which have been in the ordinary course of business of ABC.

* * *

* * *

(e) Neither Myers, Bernabi nor Laws has caused ABC to engage in any transaction affecting ABC's business or properties not in the ordinary course of business, nor has any of them caused ABC to suffer any extraordinary loss.

ABC and Israel allege in their petition that shortly before this agreement was signed, defendants Myers and Bernabi caused ABC to make interest-free loans and unauthorized payments to them personally and to entities controlled by them, amounting to $80,000. Since the motion for summary judgment does not controvert this allegation, we accept it as true for the purpose of this appeal. The petition asserts causes of action against Myers and Bernabi for (1) actual fraud, (2) breach of contract, (3) breach of warranty, (4) breach of fiduciary duty, and (5) fraud in the sale of stock.

ABC's Claim

Only Myers has filed a brief in support of the trial court's judgment. Myers contends that summary judgment against ABC was proper both because the Bangor Punta doctrine applies to the facts of this case and because ABC, having retained the benefits of the settlement and never having offered to rescind the agreement and return the consideration, cannot now escape the effect of that part of the agreement by which ABC and Israel released all claims against Myers, Bernabi, and Laws.

In Bangor Punta the Supreme Court held that a corporation cannot recover damages for corporate mismanagement if the present holders of all or substantially all of the shares acquired their shares for a fair price after occurrence of the wrongful conduct on which the suit is based. The rationale of this decision is that, if the new stockholders have acquired their shares from the alleged wrongdoers and have paid the reasonable value of their shares after considering the injury to the corporation from the mismanagement, to allow the corporation to recover would, in effect, allow the new stockholders to gain a windfall by recouping their purchase price. To prevent this inequitable result, the Court disregarded the separate existence of the corporation and held that recovery by the corporation, as well as by the stockholders, was barred. 417 U.S. at 711-13, 94 S.Ct. at 2583-84. Obviously, this rule should not be applied to the injury of the corporation's creditors, but no rights of creditors are alleged to be involved here.

ABC contends that the Bangor Punta rationale does not apply here because Israel, its principal stockholder, was not a new stockholder, as was the purchaser in Bangor Punta, but owned 48% of the stock at the time of defendants' unauthorized transactions and, therefore, would not be barred in a stockholder's action from claiming injury from the wrongful acts alleged. Alternatively, ABC argues that Bangor Punta should be applied only pro rata to the "tainted shares" acquired by Israel from defendants.

We conclude that prior ownership of other shares does not exclude application of the Bangor Punta doctrine to the extent of the shares acquired from the wrongdoers. If we disregard the separate existence of the corporation in order to do exact justice between former and present stockholders, to bar recovery altogether because only 50% of the stock was sold would allow the wrongdoers to keep their ill-gotten gains to the detriment of present stockholders who owned their shares at the time of the wrongdoing. On the other hand, to permit recovery by the corporation for the full amount of the unauthorized withdrawals would allow the purchasers of the stock a windfall to the extent of the shares acquired from the wrongdoers, who were misappropriating their own funds to the extent of their 50% stock ownership. Since Bangor Punta is an equitable doctrine designed to prevent unjust enrichment, we conclude that it should be applied to the extent necessary to prevent unjust enrichment, but no further.

We note that in Home Fire Insurance Co. v. Barber, 67 Neb. 644, 93 N.W. 1024, 1035-36 (1903), one of the authorities on which the Supreme Court relied in Bangor Punta, the Supreme Court of Nebraska, while denying the corporation's right to recover for mismanagement that occurred before the principal stockholder bought his shares from the wrongdoers, allowed the corporation full recovery for unauthorized withdrawals and conversion of funds before the sale. The Nebraska court rested this distinction on the difference between a proceeding in equity and a suit at common law. In equity, the court said, the separate existence of the corporation could be disregarded and the corporation's suit could be regarded as brought for the benefit of its stockholders, but in a suit at law to recover the corporation's property only the corporation's rights could properly be considered. Under our blended Texas system of law and equity, we see no reason why the separate existence of the corporation should be disregarded in one case but not in another. In either case, the corporation's recovery is ultimately for the benefit of its stockholders (aside from the rights of creditors), and in either case, to allow the corporation full recovery for a wrong done before the present stockholders acquired their shares would give them the same kind of windfall. Consequently, we see no reason to exclude actions at law for misappropriation of funds from application of the Bangor Punta doctrine or to determine whether the present action should be considered as invoking an equitable or legal remedy.

ABC contends further that none of its recovery here should be barred by the Bangor Punta doctrine because of defendants' fraud and breach of warranty. We cannot agree. We conclude that ABC, as distinguished from its stockholders, has no basis for a claim based on fraud or breach of warranty. The only basis alleged for fraud or breach of warranty is the representations and warranties in the...