Coffee v. Permian Corporation, 72-1814.

• Decision Date: 29 May 1973
• Docket Number: No. 72-1814.,72-1814.
• Citation: 474 F.2d 1040
• Parties: Charles Wendell COFFEE, Plaintiff-Appellee, v. The PERMIAN CORPORATION et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

474 F.2d 1040 (1973)

Charles Wendell COFFEE, Plaintiff-Appellee, v. The PERMIAN CORPORATION et al., Defendants-Appellants.

No. 72-1814.

United States Court of Appeals, Fifth Circuit.

February 20, 1973.

Certiorari Denied May 29, 1973.

F. H. Pannill, W. B. Browder, Jr., Midland, Tex., for defendants-appellants.

Charles E. Galey, Lubbock, Tex., for plaintiff-appellee.

Gerald Huffaker, Tahoka, Tex., for Layman.

Before MORGAN, CLARK and INGRAHAM, Circuit Judges.

Certiorari Denied May 29, 1973. See 93 S.Ct. 2736.

LEWIS R. MORGAN, Circuit Judge:

In this case Charles Wendell Coffee brought suit against the Permian Corporation and several of its directors alleging a violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5 of the Securities Exchange Commission, 17 C.F.R. 240.-10b-5. Coffee claimed that defendants, as majority stockholders, engaged in a scheme to defraud him of the value of his stock in the J. B. Knight Company, Inc., by liquidating Knight Company when its stock had a value of approximately $20.00 per share. A jury found in favor of Coffee and defendants appeal on the grounds that the evidence was insufficient to support a finding of fraudulent plan of liquidation; that the evidence was insufficient to support the jury's finding that some, but not all, of the defendants knowingly participated in the fraudulent scheme; that there was no proper proof of the value of plaintiff's stock at liquidation; and that the court erred in allowing judgment for exemplary damages. Having considered all these assignments of error, we affirm the judgment below.

FACTS

On March 31, 1965, Coffee purchased 1,000 shares of stock in the J. B. Knight Company which was at that time principally owned by Mr. J. B. Knight and members of his immediate family. Shortly thereafter, Permian Corporation completed an agreement with Knight Company whereby Permian purchased 50% of Knight Company stock and agreed to furnish Knight Company with the necessary capital to finance the building and selling of farm irrigation systems. The financing was accomplished through a wholly owned Permian subsidiary, the Cambrian Finance Company. After the agreement was signed several members of the board of directors at Permian also became members of the board at Knight Company and Cambrian.

Due to a number of factors, Knight Company began losing money in its farm irrigation business and it became necessary to secure additional operating funds in addition to those already being received from Cambrian. Actual loans and loan commitments, all of which were guaranteed by Permian, were obtained from the Midland National Bank. In June of 1966, Cambrian decided to go out of business and as a result the company was dissolved and its paper discounted for a total loss of $55,000.00. At a special board of directors meeting this loss was shifted to Knight Company by causing Knight Company to execute a note to Permian for the amount of the loss. Coffee was never informed of this transaction.

In August of 1966, appellant W. R. Davis, as president and chief executive officer at Permian, forced Mr. J. B. Knight to resign as president of the Knight Company by threatening to send Knight Company into bankruptcy by calling in all the demand notes held by Permian. Davis and appellant C. R. Herpich, a board member at both Permian and Knight Company, selected A. L. Bennett as the new president of Knight Company.

In November of 1966, Permian merged into Occidental Petroleum Corporation and shortly thereafter, on december 27, 1966, the Knight family sold its stock back to the Knight Company and received a note in return. The Knight shares were then cancelled and Permian's ownership in Knight Company increased to 80.02%.

During the month of August 1967, several of the board members indicated a desire to liquidate the Knight Company. At that point the company showed a profit of over $50,000.00 for the first seven months of 1967, and the financial statement listed the indebtedness to Permian and Midland National Bank as long-term liabilities. The balance sheet reflected a shareholder's equity of $1,116,055.00. None of the above information was ever disclosed to Coffee. However, the financial statement of September 30, 1967, was presented to Coffee and this statement noted the indebtedness to Permian as a current liability. Shifting the indebtedness from a long-term to a current liability resulted, of course, in a drastic reduction in the amount of working capital reflected on the financial statement.

Knight Company called a meeting of its creditors, and on October 23, 1967, the directors showed the creditors the September 30th financial statement as evidence of the company's financial condition. Subsequently, and without allowing the shareholders to vote as required by Texas law,¹ Knight Company was liquidated. At some time during the liquidation process Permian purchased outstanding Knight Company accounts totaling $628,993.00 at a discount, paying only $390,230.05 for these accounts. In the meantime, the Knight family was paid less than 50% of the face value of its note which was executed when the family's stock was sold back to the Knight Company. Permian's parent company, Occidental, received a $115,000.00 tax benefit as a result of the Knight Company liquidation.

Plaintiff Coffee filed suit in federal district court on July 7, 1969, claiming that Permian Corporation and certain of its directors had engaged in a scheme to defraud him of the value of his stock in violation of the federal securities laws and the Texas statutes² dealing with the rights of minority shareholders. Initially, the district court dismissed the complaint on the ground that plaintiff did not allege facts sufficient to demonstrate that he was a purchaser or seller of securities within the ambit of § 10(b)(5), supra. This court reversed, however, and held that plaintiff's complaint alleging the liquidation of Knight Company gave him standing as a seller of securities. Coffee v. Permian Corporation, 5 Cir. 1970, 434 F.2d 383. On remand a trial was had before a jury which found in favor of plaintiff by returning answers to several interrogatories which will be discussed later.

I

Defendants' principal assignment of error is that there was insufficient evidence before the jury to support a finding that they engaged in a scheme to cheat Coffee out of the value of his stock. Proof of a scheme to defraud failed, defendants claim, because there was no evidence that either Permian or the individual defendants took over the Knight Company assets after liquidation or that the defendants ever received any sort of financial gain or profit as a result of the liquidation. In our view this argument would, if accepted as a principle of law by this court, lead to results completely contrary to the intent and spirit of the Securities and Exchange Act of 1934, supra. We would be holding in effect that, regardless of the amount of evidence revealing a scheme to defraud, the perpetrators of the scheme could not be made to reimburse a minority stockholder unless the manipulative plan was successful and carried to its completion after liquidation. The flaw in such a proposition is immediately apparent. The interest of the minority stockholder, which is protected by the Securities Exchange Act, is not at all affected by whether or not the fraudulent plan actually brings a profit to the defrauding shareholders after the corporation is wrongfully liquidated. If the plan to dissolve is fraudulent the damage to the minority stockholder occurs at liquidation, and Congress could not have intended the right of recovery to depend, as a matter of law, on what happens after that point. Assuming the majority stockholders devised a fraudulent plan and liquidated the corporation, there exist any number of reasons why they might choose not to follow through and take their intended profit after the minority shareholders have been deprived of the value of their stock. For example, the majority stockholders might suddenly fear discovery of the plan and legal prosecution; or changing market conditions could render the initial scheme unprofitable. But regardless of the reason, the defrauded stockholder has suffered a loss and it is clear that his right of recovery cannot be foreclosed by whatever action the perpetrators of the scheme do or do not take after liquidation. What we...