Eastwood v. National Bank of Commerce, Altus, Okl.

• Decision Date: 25 August 1987
• Docket Number: Civ. No. 87-819-R.
• Citation: 673 F. Supp. 1068
• Parties: Babe EASTWOOD, an individual, and Eastwood Rentals, Inc., a corporation, Plaintiffs, v. The NATIONAL BANK OF COMMERCE, ALTUS, OKLAHOMA, a national banking association; Rental Tools, Inc., an Oklahoma corporation; Ken Fergeson, an individual; Harold Hamm, an individual; and Phil G. Carson, an individual; Defendants.
• Court: U.S. District Court — Western District of Oklahoma

673 F. Supp. 1068

Babe EASTWOOD, an individual, and Eastwood Rentals, Inc., a corporation, Plaintiffs, v. The NATIONAL BANK OF COMMERCE, ALTUS, OKLAHOMA, a national banking association; Rental Tools, Inc., an Oklahoma corporation; Ken Fergeson, an individual; Harold Hamm, an individual; and Phil G. Carson, an individual; Defendants.

Civ. No. 87-819-R.

United States District Court, W.D. Oklahoma.

August 25, 1987.

Robert D. Edinger, Travis A. Pickens, Musser, Bunch, Robinson & Hirsch, Oklahoma City, Okl., for plaintiffs.

John N. Hermes, Kenneth L. Buettner, Oklahoma City, Okl., Ralph E. Seals, Jr., Michael E. Smith, Tom L. Newby, McKnight & Gasaway, Enid, Okl., for defendants.

ORDER

DAVID L. RUSSELL, District Judge.

Before the Court are three motions to dismiss Plaintiffs' complaint and a motion to stay this action, insofar as it is brought on behalf of Eastwood Rentals, Inc., until the attorney for that Plaintiff produces evidence of his authority to act on behalf of that company, the stock of which was purchased by one of the Defendants herein and which is being liquidated.

The Plaintiffs herein are Eastwood Rentals, Inc. and Babe Eastwood, one of two of the former stockholders in Eastwood Rentals, Inc. See Complaint at ¶ 11. The Eastwood Rentals stock issued to both stockholders was pledged to First National Bank of Enid, Oklahoma, to secure three loans made by that bank to Eastwood Rentals. Id. at ¶ 15. Those loans were also secured by other property of Eastwood Rentals, including United States Treasury Investments Growth Receipts, labeled "TIGRS", having a maturity date of August 15, 2002 and a par value of $493,000. Id. Two of the loans, representing $1,456,335.60 of indebtedness, required monthly payments beginning September 1, 1986. Id. at ¶ 14(b) & (c). One of these loans and a third loan, see id. at ¶ 14(d), which did not require monthly payments, were due and payable in their entirety on March 2, 1987. Id. at ¶ 14(c) & (d).

Plaintiffs allege that Eastwood Rentals made the required monthly payments on the loans for the months of September through November. Id. at ¶ 17. In November, the bank was declared insolvent and the FDIC assumed the bank's operations. Id. at ¶ 18. Thereafter, the FDIC apparently sold the loans made by First National Bank of Enid to Eastwood Rentals to Defendant The National Bank of Commerce, Altus, Oklahoma ("Defendant Bank"), which had previously been an "upstream participant" in the loans. See Id. at ¶ 20. Plaintiffs allege that Defendant Bank through its chairman of the board of directors made misrepresentations to the effect that "no further action" was required by Eastwood Rentals in connection with the loans until a meeting could be arranged to discuss restructuring the loans, id. at ¶ 20; that Defendant Bank "would agree to restructure" Eastwood Rentals' indebtedness, id. at ¶ 22; and "would agree" to Eastwood Rentals' proposal for restructure, id. at ¶ 26, which were "designed to lull the Company Eastwood Rentals and Eastwood into a belief that the Bank was willing to restructure the company's indebtedness," id. at ¶ 38, while Defendant Bank was actually secretly scheming to liquidate Rental Tools and retire its indebtedness to the bank. Id. Plaintiffs allege that in reliance on the representations and "pending negotiations to restructure" the loans, Eastwood Rentals didn't make monthly payments in December of 1986 or January of 1987, and ultimately the Bank foreclosed on the stock collateral by selling it at a private sale to Eastwood Rentals' competitor, Defendant Rental Tools, for $500. Id. at ¶ 32. Rental Tools is now liquidating Eastwood Rentals, Plaintiffs allege. Id. at ¶ 34. Plaintiffs also allege that in January of 1987, Defendant Bank requested that Eastwood Rentals convey to it the TIGRS "as a means to reduce the company's Eastwood Rentals' principal indebtedness pending the loan restructure." Complaint at ¶ 24. They allege that Eastwood Rentals did so "in reliance on the pending loan restructure," after which Defendant Bank sold them to a third party for approximately $135,000. Id. at ¶ 24.

The complaint alleges that Defendant Bank and its chairman and president violated Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5, and that the remaining Defendants aided, abetted those Defendants or conspired with them to violate Rule 10b-5 (First Cause of Action). The complaint also alleges state law claims for fraud (Second Cause of Action), conversion (Third Cause of Action), slander (Fourth Cause of Action), interference with contract (Fifth Cause of Action), breach of contract and violation of statutory duties to preserve collateral and act in good faith (Sixth Cause of Action), and for a declaratory judgment (Seventh Cause of Action).

The complaint is verified by Plaintiff Babe Eastwood and contains a recitation that Plaintiffs have not filed this action as a collusive one, to confer jurisdiction, Complaint at ¶ 36, indicative that Plaintiff Babe Eastwood is suing derivatively on behalf of the Eastwood Rentals. And as this Court parses the Complaint, the claims predicated upon the pledge and sale of Eastwood Rentals' treasury bonds is brought derivatively, only, and the claims predicated upon the foreclosure sale of stock in Eastwood Tools are brought by Plaintiff Babe Eastwood, only, in his own right.

I. Motion to Stay

Defendants Harold Hamm ("Hamm") and Rental Tools, Inc. ("Rental Tools") have moved to stay this action insofar as it is brought on behalf of Eastwood Rentals until, pursuant to Okla.Stat. tit. 5, § 5, the attorney prosecuting this action produces the authority under which he appears on behalf of Eastwood Rentals. Plaintiffs question the applicability of the state statute to these proceedings. They also assert that the authority of the attorney to act on behalf of Eastwood Rentals is inextricably intertwined with the merits herein and the issue of who is properly in control of Eastwood Rentals such that a determination of the attorney's authority is inappropriate at this time. Because the Court finds herein that Plaintiff Babe Eastwood has standing to sue derivatively on behalf of Eastwood Rentals and Defendants have not challenged the authority of Plaintiff Babe Eastwood's counsel to represent that Plaintiff, Defendant's motion to stay is denied.

II. Motion to Dismiss of Defendants National Bank of Commerce, Altus, Oklahoma and Ken Fergeson

An initial issue raised by these Defendants' motion to dismiss pursuant to Rule 12(b)(1) and (b)(6), F.R.Civ.P., is Plaintiffs' standing to sue under Rule 10b-5. Defendants correctly point out that Plaintiffs' pleading must establish that they are purchasers or sellers of securities to entitle them to sue for Rule 10b-5 violations. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975); Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2nd Cir.1952), cert. denied, 343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952); J.D. Simmons, Inc. v. Alliance Corp., 79 F.R.D. 547, 550-51 (W.D.Okla. 1978); Thompson v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 401 F.Supp. 111 (W.D.Okla.1975). Defendants contend that no sale occurred when securities were pledged as security for commercial loan transactions or upon subsequent foreclosure of the collateral, relying principally upon Lincoln National Bank v. Herber, 604 F.2d 1038, 1045 (7th Cir.1979). The "sale" of Plaintiff Babe Eastwood's stock in connection with which the alleged fraud occurred, according to Plaintiffs' allegations, was not the initial "pledge" of the securities but the foreclosure sale thereof. The "sale" of Plaintiff Eastwood Rentals' zero coupons in connection with which fraud is alleged to have occurred was the conveyance or pledge and sale immediately thereafter. Thus, an issue of first impression in this district and in the Tenth Circuit is presented: Whether a pledgor of securities has standing as a "seller" under Rule 10b-5 when the securities are sold to pay off loans against which the securities were pledged. Essentially all of the courts which have been confronted with this issue have concluded that the answer is in the affirmative. See Madison Consultants v. Federal Deposit Insurance Corp., 710 F.2d 57, 61 (2nd Cir.1983); Bosse v. Crowell, Collier & MacMillan, 565 F.2d 602, 611 (9th Cir.1977); McClure v. First National Bank of Lubbock, Texas, 497 F.2d 490, 495 (5th Cir.1974), cert. denied, 420 U.S. 930, 95 S.Ct. 1132, 43 L.Ed.2d 402 (1975); Lincoln National Bank v. Lampe, 414 F.Supp. 1270, 1278 (N.D.Ill.1976); Dopp v. Franklin National Bank, 374 F.Supp. 904, 907-09 (S.D.N.Y.1974); Cambridge Capital Corp. v. Northwestern National Bank of Minneapolis, 350 F.Supp. 829, 833 (D.Minn.1972). Indeed, even in the Lincoln National Bank v. Herber case cited by Defendants, the Seventh Circuit, while holding that a pledge of securities is not a sale, recognized that "it is possible that a sale may occur at a later point if the pledgee in fact forecloses on the stock after default on the loan...." 604 F.2d at 1044. Where the pledge is itself induced by fraud followed in close proximity by a sale of the pledged securities, as is alleged with respect to the pledge and sale of Eastwood Rentals' treasury bonds, the alleged fraud occurs in connection with a sale of securities and the pledgor has standing as a seller under Rule 10b-5. See Bosse v. Crowell, Collier and MacMillan, 565 F.2d 602, 611 (9th Cir.1977). And where fraud occurs in connection with a foreclosure sale of pledged securities, parties who are directly or indirectly entitled to receive the proceeds of the sale of the pledged securities, like Plaintiff Babe Eastwood herein, should be considered sellers for purposes of the standing requirement under Rule 10b-5. See, e.g., Cambridge Capital Corporation v. Northwestern National Bank of Minneapolis, 350 F.Supp. at 834. Thus, the Court finds that both the individual Plaintiff and the...