El Dorado Bancshares, Inc. v. Martin, Civ. A. No. 88-2100-O.

• Decision Date: 12 December 1988
• Docket Number: Civ. A. No. 88-2100-O.
• Citation: 701 F. Supp. 1515
• Parties: EL DORADO BANCSHARES, INC., Plaintiff, v. Charles J. MARTIN, Steven C. Martin, Robert L. Martin, and Mary L. Martin, Defendants.
• Court: U.S. District Court — District of Kansas

701 F. Supp. 1515

EL DORADO BANCSHARES, INC., Plaintiff, v. Charles J. MARTIN, Steven C. Martin, Robert L. Martin, and Mary L. Martin, Defendants.

Civ. A. No. 88-2100-O.

United States District Court, D. Kansas.

December 12, 1988.

Randolph G. Willis and Randall Rings, Watson, Ess, Marshall & Enggas, Olathe, Kan., for plaintiff.

B.J. Hickert, Morrison, Hecker, Curtis, Kuder & Parrish, Wichita, Kan., Michael J. Jerde, Morrison, Hecker, Curtis, Kuder & Parrish, Kansas City, Mo., for defendants.

MEMORANDUM AND ORDER

EARL E. O'CONNOR, Chief Judge.

This matter is before the court on the motion of the plaintiff El Dorado Bancshares, Inc., (El Dorado) for the court to reconsider its memorandum and order dated October 13, 1988.¹ El Dorado brought an action against the defendants Charles J. Martin, Steven C. Martin, Robert L. Martin, and Mary L. Martin (the Martins) seeking recovery of money damages for breach of fiduciary duty (count 1), violations of the federal securities laws (count 2), and violations of state securities laws (count 3). The Martins moved for summary judgment, and our order dated October 13, 1988, granted their motion. However, in our order, we stated: "We are compelled to comment that we are somewhat hesitant to render summary judgment given the confusing state of the current record.... We will examine with particular care a timely submitted motion for reconsideration with accompanying evidence...." Having received such a motion, we now re-examine the facts and our earlier conclusions.

I. The Facts.

El Dorado is a bank holding company with one principal asset: Citizens State Bank of El Dorado, Kansas (CSB). Prior to September 23, 1982, the Martins, along with other individuals, were the officers, directors, and owners of seventy-five percent (75%) of the stock of El Dorado. During 1982, differences arose between these directors of El Dorado and Steven Baker (Baker), the twenty-five percent (25%) owner and the president of El Dorado and the chief executive officer and chairman of the board of CSB.

Apparently, because of their differences, Baker and the directors determined that one or the other must end affiliation with El Dorado and CSB. In July 1982, El Dorado and the directors executed a document entitled "Redemption Agreement" whereby El Dorado agreed to purchase from the directors 432,546 shares of stock for a total price of $1,654,288.86. In September 1988, the directors sold their stock, but the parties disagree as to the details surrounding the transaction. The Martins assert that Baker purchased the stock of the directors, including the Martins. For support, they rely on an El Dorado stock certificate dated September 23, 1982. The certificate indicates that Baker is the registered holder of 432,546 shares of stock; however, the certificate does not state what party was the transferor of the shares. The certificate does include the original certificate numbers of the shares held by Baker, which are somewhat legible when reading the photocopy of the document, and which indicate that the stock was originally issued to the directors. However, this evidence does not prove that the directors sold directly to Baker; it is possible that the stock was purchased by El Dorado, held as treasury stock, and then transferred by El Dorado to Baker.

El Dorado contends that the directors sold their stock to El Dorado, which in turn sold the stock to new investors. For support, El Dorado relies on the affidavits of two of the new investors. However, although the affidavits themselves state that the new investors purchased their stock from El Dorado, the exhibits accompanying the affidavits indicate that Baker was the transferor of the stock. In exchange for their stock, El Dorado contends that the directors received $2,029,580.45 in cash and $2,179,435.79 in the form of relief from stock loans.

The court interprets the evidence surrounding the September 1982 stock transfers as follows: Pursuant to the agreement that either he or the other directors must go, in September 1982, Baker solicited potential investors to purchase an interest in El Dorado. These investors were to receive the 432,546 shares of stock which had been held by the directors. On September 23, 1988, the investors contributed capital to El Dorado. On the same date, the directors sold their stock, either to El Dorado or directly to Baker. In any event, Baker was issued an El Dorado stock certificate indicating that he held 432,546 shares. Later, Baker transferred these shares to the new investors.

Two of the new investors were Wally McClanahan (McClanahan) and Richard Teichgraeber (Teichgraeber). As with the transactions whereby the directors sold their stock, the transactions whereby the new investors purchased their interests are confusing, poorly delineated, and interpreted in different manners by El Dorado and the Martins. El Dorado contends that on September 23, 1988, McClanahan paid El Dorado $250,000.00; in return, on October 4, 1982, he became the registered holder of 32,873.496 shares of stock (previously registered to Baker), and he received a promissory note from El Dorado (signed by Baker) in the amount of $75,491.63. El Dorado further asserts that on September 23, 1988, Teichgraeber paid El Dorado $350,000; in return, on October 4, 1982, he became the registered holder of 57,096.072 shares of stock (previously registered to Baker), and he received a promissory note from El Dorado (signed by Baker) in the amount of $46,906.46.

The Martins assert that the initial investment of McClanahan and Teichgraeber in El Dorado was more complicated. They contend, and we agree, that the facts surrounding the transaction were as follows: In mid-September 1982, McClanahan, acting for himself and for Teichgraeber (McClanahan was Teichgraeber's son-in-law, they were in business together, and they had previously expressed an interest in buying a stake in El Dorado), met with Baker to discuss investment in El Dorado. A certified public accountant representing McClanahan and Teichgraeber attended one meeting. Prior to September 23, 1982, the accountant made a cursory review of some general financial information relating to El Dorado. Apparently, on September 23, 1982, McClanahan and Teichgraeber decided to invest. McClanahan paid $250,000.00 and Teichgraeber paid $350,000 to Baker,² and in return, they received El Dorado stock which Baker held (the number of shares that they received was contingent on the market value of the stock). Additionally, Baker arranged for El Dorado to execute promissory notes to McClanahan in the amount of $75,491.63 and to Teichgraeber in the amount of $46,906.46. However, McClanahan and Teichgraeber were somewhat uncertain about the investment because they had not had an adequate opportunity to review in detail the financial documents of El Dorado and CSB, and they therefore agreed with Baker that their investment was conditional: they would have thirty days from the date on which they received the full financial statements of El Dorado in which to determine whether they would fully honor their initial, conditional commitment. Eventually, the accountant was furnished with more-detailed records, but he never received the scope of information which McClanahan and Teichgraeber anticipated. Following the accountant's review, McClanahan and Teichgraeber demanded a reduction in the price that they paid for their shares. Eventually, Baker agreed to reduce the price paid by McClanahan by $100,000.00, and the price paid by Teichgraeber by $200,000.00. Teichgraeber, acting for himself and for McClanahan, agreed to accept notes for these amounts from Baker if the notes were collateralized. On January 14, 1983, Baker executed notes indicating that he was indebted to McClanahan in the amount of $100,000.00, and to Teichgraeber in the amount of $200,000.00; the notes were never collateralized.

On March 30, 1983, McClanahan and Teichgraeber brought an action in Kansas state court against Baker to collect on the notes. The action was dismissed without prejudice on August 23, 1983. On October 23, 1983, McClanahan and Teichgraeber brought an action in Kansas state court against El Dorado, Baker, the Martins, and the other original directors, seeking rescission of their purchase of stock and damages in the amount of $600,000.00 for alleged violations of federal banking laws with respect to the September 1983 transactions. The action was removed to federal court and then remanded to state court; McClanahan and Teichgraeber have settled their claims against El Dorado, but the other claims apparently are still pending. McClanahan and Teichgraeber filed another complaint in state court against Baker, the Martins, and the other original directors, asserting that Baker made misrepresentations in connection with making illegal loans associated with the September 1982 transaction, and that the other defendants knew or should have known of the illegality of the loans and rejected the loans. This complaint prays for a judgment in excess of $10,000.00, and it too is pending.

On April 30, 1984, McClanahan sold his 32,874 shares of El Dorado stock to James H. Hentzen (Hentzen) for $32,874.00. On the same date, Teichgraeber sold his 57,096 shares to Hentzen for $57,096.00. Additionally, Hentzen agreed that if El Dorado defaulted on the promissory notes it issued on September 23, 1982, to McClanahan in the amount of $75,491.63 and to Teichgraeber in the amount of $46,906.46, Hentzen would personally purchase the notes from McClanahan and Teichgraeber for an amount equal to the principal plus interest.

On March 23, 1987, McClanahan and Teichgraeber made demand on El Dorado for payment of the notes executed on September 23, 1982. El Dorado did not pay, and McClanahan and Teichgraeber therefore made demand on Hentzen. He informed them that he was unable to pay on the notes. Eventually, on January 22, 1988, McClanahan, Teichgraeber, and...