Citizens Nat. v. Allen Rae Investments

• Decision Date: 15 July 2004
• Docket Number: No. 2-02-095-CV.,2-02-095-CV.
• Citation: 142 S.W.3d 459
• Parties: CITIZENS NATIONAL BANK and Lender Asset Recovery, Inc., and Don Lawson, Appellants, v. ALLEN RAE INVESTMENTS, INC., Ruth Narramore, Ruth Ann Taylor, and Erika Taylor, Appellees.
• Court: Texas Court of Appeals

142 S.W.3d 459

CITIZENS NATIONAL BANK and Lender Asset Recovery, Inc., and Don Lawson, Appellants, v. ALLEN RAE INVESTMENTS, INC., Ruth Narramore, Ruth Ann Taylor, and Erika Taylor, Appellees.

No. 2-02-095-CV.

Court of Appeals of Texas, Fort Worth.

July 15, 2004.

Appeal from the 271st District Court, Wise County, John H. Fostel, J Dee J. Kelly, Jr., Brian S. Stagner, Todd W. Spake, Kelly, Hart & Hallman, P.C., Mr. Bryan D. Burner, Bruner, Jamieson & Pappas, L.L.P., W. Alan Wright, Karen S. Precella, Benjamin L. Mesches, Haynes and Boone, L.L.P., Bruce W. McGee, Gandy, McGee & Hall, P.C., Fort Worth, for Appellants.

J. Kevin Clark, Kirkley, Schmidt & Cotten, L.L.P., Joseph W. Spence, J. Christopher Nickelson, Shannon, Gracey, Ratliff & Miller, L.L.P., Fort Worth, Michael. A. Simpson, Derrick S. Boyd, Simpson & Boyd, Decatur, for Appellees.

Panel A: CAYCE, C.J.; and DAUPHINOT, J.

OPINION ON REHEARING

LEE ANN DAUPHINOT, Justice.

After reviewing Appellant Don Lawson's motion for rehearing, Appellees' motion for rehearing, and Appellants Citizens National Bank's and Lender Asset Recovery's response to the motions for rehearing, we deny the motions. We withdraw our March 11, 2004 opinion and judgment and substitute the following.

This appeal is from a lawsuit involving a loan Citizens National Bank (CNB) made to Allen Rae Investments, Inc. (ARI) and upon which ARI defaulted. Appellants CNB, Lender Asset Recovery, Inc. (LAR), and Don Lawson appeal from a judgment awarding approximately $1.2 million to Appellees ARI and its principals, Ruth Narramore, Ruth Ann Taylor, and Erika Taylor. We affirm the judgment against LAR. Regarding CNB and Lawson, we reverse and render in part, affirm in part, and remand the case to the trial court for recalculation of prejudgment interest and entry of judgment in accordance with this opinion.

I. BACKGROUND FACTS

In 1996, Ruth, her daughter Ruth Ann, and Ruth Ann's daughter Erika formed ARI for the purposes of building, owning, and operating a Motel 6 in Decatur, Texas.¹ Each woman owned one hundred shares of ARI's stock and served as a company officer. ARI was authorized to issue one thousand shares of stock, but only three hundred were issued at this time.

Appellees began negotiating a deal with Motel 6. A Motel 6 representative told Appellees that they could build a Motel 6 with a ten-percent down payment and a ninety-percent loan. Appellees purchased a Motel 6 franchise. Motel 6 recommended that Appellees contact The Money Store, a Colorado lending institution, to seek financing for their project because that lender had provided loans on other Motel 6 projects. At the time Appellees purchased the franchise, a Motel 6 project cost $1.2 to $1.4 million. The Money Store prequalified Appellees for a $576,000 loan. Contrary to what the Motel 6 representative had told Appellees, however, The Money Store required a twenty-percent down payment on a Motel 6 loan. Appellees learned that a twenty-percent down payment was a standard requirement for start-up companies in this type of venture. Although Appellees' franchise agreement with Motel 6 expired on August 30, 1997, Motel 6 was willing to move forward with the Decatur Motel 6 project if ARI began construction on the motel during 1998. By the end of 1997, the cost of a Motel 6 project had risen to $1.8 million. According to Ruth Ann, at that time ARI was willing and able to pay twenty percent down on a $1.8 million loan.

In December 1997, in a further attempt to secure financing for a Motel 6 project, Ruth Ann contacted CNB. At that point, Appellees had never been formally rejected for a loan. Ruth Ann spoke by telephone with Don Lawson, a business development officer at CNB. She informed Lawson that ARI wanted to borrow money to build a Motel 6, forwarded a business proposal to him, and told him that ARI preferred a ninety-percent loan, but that it was open to other options because the principals wanted to build a Motel 6.

Meanwhile, Boyd L. Stewart, national sales director for Bed & Bath Inns Inc. (Bed & Bath), met with Doug Sanders, executive vice president of CNB. Stewart wrote a follow-up letter to Sanders on January 2, 1998, expressing "thanks for the efforts and support coming from [Sanders] and Ray[mond Dickerson]," CNB's president. The letter discussed a past joint meeting with A.J. Lambert about his land and a meeting with Larry Barnes, a client of CNB and potential franchisee of Bed & Bath. It also indicated Bed & Bath's plan to have the second meeting with Barnes at the Gainesville, Texas Bed & Bath Inn, emphasizing that "[t]he Gainsville property shows well and always creates heightened interest on the part of the buyer." Stewart stated in the letter that he "believ[ed] enough Bed & Bath Inn projects could be completed in the first six months of 1998" to "significantly impact the aggressive revenue goal [Sanders] and Ray ha[d] set for [CNB]." This letter was followed by a business presentation to more CNB employees on January 14, 1998. Lawson attended this presentation.

On January 21, 1998, Ruth Ann met with Lawson for thirty minutes at CNB. Lawson told her that ARI could not finance a $1.8 million Motel 6 project with a down payment of only ten percent. He also claimed at trial that she told him that ARI did not want to put more than $140,000 down.

Lawson testified that he thought the Bed & Bath presentation he had attended a week earlier was "hit or miss," and he "didn't buy into the Bed & Bath sales pitch." Despite his misgivings, without divulging any information about his or CNB's prior relationship with Bed & Bath, or any of his own doubts about Bed & Bath's claims, Lawson informed Ruth Ann about Bed & Bath, a less expensive motel chain, gave her a copy of the Bed & Bath brochure he had received from Bed & Bath, and discussed it with her. He suggested that ARI consider the Bed & Bath project, telling Ruth Ann that a Bed & Bath motel would cost less and could be built faster than a Motel 6. Lawson also told Ruth Ann that CNB would extend a U.S. Small Business Administration (SBA) loan on the Bed & Bath project, but not on another project. When Lawson recommended Bed & Bath to Appellees, neither Lawson nor CNB had conducted any due diligence regarding the company, investigated whether the information in the brochure was correct, or determined the creditworthiness of Bed & Bath. At trial, Lawson ultimately admitted that based on its assets and those of its principals, ARI could have come up with enough money for a twenty-percent down payment for the Motel 6 project.

A few weeks after receiving the Bed & Bath franchise information from Lawson, Appellees met with Doug Biter, a Bed & Bath representative. During their two-hour meeting, Appellees discussed the project with Biter and further reviewed Bed & Bath literature. At a later meeting with Biter, Appellees toured the Gainesville facility. Appellees had numerous telephone conversations with Bed & Bath representatives and received and reviewed additional literature from Bed & Bath.

On February 20, 1998, ARI submitted a detailed investment proposal to CNB. On March 4, 1998, CNB sent Appellees a letter indicating that it had "agreed to pursue approval for [the] loan request for the acquisition of real estate and construction of a Bed & Bath Inn in Decatur, Texas," providing the terms for the loan, and requesting $3,500 in earnest money before assembling the loan package. Only after receiving this document did ARI purchase a Bed & Bath franchise for $25,000. CNB approved the $600,000 loan on March 17. The projected cost to complete the Bed & Bath project was $750,000.

Although CNB approved the $600,000 loan in the middle of March, it did not close on it until September 23, 1998, five months later. During those five months, Lawson and CNB executive vice president Doug Sanders, the officer responsible for ARI's loan, attempted to obtain required financial information from Bed & Bath. Because Bed & Bath would not cooperate, Lawson wrote a memorandum to Bed & Bath requesting year-end (1997) balance sheets, income statements, tax returns, and other financial documents. The memo read, in part:

We have sent several referrals to you for this project. We feel there are many more that we would send, but are starting to lose our enthusiasm by having to work so hard at getting initial information from you. This is considered an urgent problem to Doug and I. We could be on the verge of losing a deal we switched from Motel 6 to you because of the delay.

Testimony showed that CNB never gave a copy of this memo, or otherwise shared the information contained in it, with Appellees. The memorandum itself does not reflect that ARI was a recipient of this memo or that it received a carbon copy of it. Appellees learned about the memo after discovery began in this lawsuit.

On May 25, 1998, Bed & Bath still had not sent the requested financial information to CNB, and Lawson sent Bed & Bath another memo stating that CNB would not go forward on any other Bed & Bath project and would not recommend any other Bed & Bath projects until Bed & Bath performed on ARI's project. Ultimately, the only financial statements CNB ever received from Bed & Bath were unaudited financial statements of Amerimation, Inc., the parent company of Bed & Bath, which showed that Amerimation earned only $68,000 in income in ten months of operation. At trial, Lawson stated that he did not ask for audited financial statements because they are expensive. However, the Bed & Bath brochure specifically identified Bed & Bath's accounting firm and CPA. There is no indication that CNB or Lawson ever asked either the Bed & Bath personnel or their accountants whether audited statements were already available. Ruth Ann testified that had she known CNB was losing enthusiasm for the project and was not going to recommend anyone else to Bed & Bath, ARI would have pulled out of the deal.

The parties executed numerous...