English v. Ramo, Inc., 17663

Citation474 S.W.2d 600
Decision Date29 October 1971
Docket NumberNo. 17663,17663
PartiesH. E. ENGLISH et al., Appellants, v. RAMO, INC., et al., Appellees.
CourtCourt of Appeals of Texas. Court of Civil Appeals of Texas

Ralph W. Currie, Muse, Currie & Kohen, Logan Ford, Burford, Ryburn & Ford, Louis P. Bickel, Johnson, Bromberg, Leeds & Riggs, J. Bobert Norris, Jr., Jackson, Walker, Winstead, Cantwell & Miller, Dallas, for appellants.

Robert G. Vial, Peter Winstead, Akin, Vial, Hamilton, Koch & Tubb, Dallas, Mary Joe Carroll, Clark, Thomas, Harris, Denius & Winters, Austin, for appellees.

GUITTARD, Justice.

This case begins with the sale of all stock of Red Ball Motor Freight, Inc. by appellants, H. E. English and members of his family, to appellee Ramo, Inc. Ramo's principal stockholder, appellee TeleCom Corporation, guaranteed the purchase-money notes. We hold that appellants are entitled to accelerate the notes and that appellees are entitled to an offset for breach of express warranty in the amount found by the jury.

The purchase price was $15,500,000, including $4,000,000 cash and Ramo's notes aggregating $11,500,000. At the time of trial Ramo had paid $3,188,000 on the notes and no payments were due. Appellants sought to accelerate the balance of $8,312,000 and to foreclose their lien on the stock because of alleged breaches of the 'Noteholders Security Agreement.' Appellees denied any breach of the security agreement and prayed for judgment declaring that no ground of acceleration existed, and also claimed offsets for breach of express warranties made at the time of the sale. After a jury trial, the district court denied acceleration and allowed an offset in the amount found by the jury for one breach of warranty, but denied appellees' claim for another breach of warranty. Both sides present points of error. The facts and law relating to each phase of the appeal will be discussed separately.

1. Appellants' Claim for Acceleration.

One of the breaches of the security agreement claimed by appellants was Red Ball's advances to Ramo from time to time of funds amounting to $2,272,376. Appellants contend that these advances were dividends forbidden by the security agreement. Appellees insist that they were not dividends but were inter-company loans permitted by the agreement. We hold that they were forbidden dividends.

The dividend limitation appears among the 'covenants' of the debtor (Ramo) in Section 7(e), as follows:

'Debtor may likewise cause Red Ball to declare and pay cash dividends to Debtor on its outstanding capital stock, except that such dividends may only be declared out of profits accruing after the date of this agreement, and no dividends shall be declared or paid which would reduce the continued capital and surplus of Red Ball and its subsidiaries below the aggregate capital and surplus, as of March 31, 1968.'

Appellees admit that the amounts alleged were advanced to Ramo from funds other than profits accruing after the date of the agreement.

To establish breach of this covenant as a default authorizing acceleration, appellants rely on the following provision in Section 5(e) of the security agreement:

'* * * if the Debtor defaults in the performance of any covenant, condition or agreement contained in this Agreement, and if such default mentioned in this paragraph shall not have been remedied to the satisfaction of the holders of the Notes issued hereunder, within thirty (30) days after written notice thereof shall have been received by the Debtor from such holder or holders, same shall constitute an act of default.'

There is evidence that notice of default was given and that no satisfactory cure was effected within thirty days.

a. Evidence to Support Jury Finding.

The court submitted to the jury as Issue No. 18 the following:

'Do you find from a preponderance of the evidence that on the occasion of each transfer of funds of Red Ball to Ramo aggregating an amount of approximately $2,272,376, Ramo at that time had no intention of re-paying the same?'

The jury answered 'Ramo did not have intention to repay.' In rendering judgment denying acceleration, the trial court sustained appellees' motion to disregard the answer to Issue No. 18. Appellants contend in their first point that there is evidence to support the jury's finding. We agree.

The evidence is substantially without dispute. When the sale was closed and the security agreement was signed on June 21, 1968, Red Ball's books showed undistributed profits of more than $2,250,000. On June 24, the next business day, Ramo withdrew $1,500,000 in cash from Red Ball's account. Ramo gave Red Ball no note and made no agreement to pay interest. No resolution of Red Ball's board of directors authorized a loan to Ramo and no resolution of Ramo's board authorized borrowing any amount from Red Ball. The only formality was a notation on Red Ball's books of $1,500,000 'advance receivable' from Ramo, and on Ramo's books of the same amount as an 'advance payable to subsidiary.' The withdrawal was made on order of Grogan Lord, chairman of the boards of Red Ball, Ramo and TeleCom, and chief executive officer of all three.

After this first advance, Red Ball's checks were used from time to time to pay Ramo's obligations, including interest payments on the notes held by appellees, until on October 1, 1969, the total came to $2,272,375. In each instance there was no formality other than notations on the books of Red Ball and Ramo.

Grogan Lord and other officers of Ramo testified that they intended for Ramo to repay the advances to Red Ball. No method of funding such repayment was planned or even discussed. Lord testified that the three companies were all part of TeleCom and were 'just like one company.' He said that since the indebtedness was not owed to outside interests, repayment was a matter of inter-company decision, that how the funds were used was a responsibility of management, and that they would be applied to the best interest of the stockholders.

There is no suggestion that Red Ball's affairs were managed by an independent board of directors. Five of the six Red Ball directors were also directors of TeleCom and four were directors of Ramo. Ramo picked Red Ball's directors and determined its financial policy . All of Red Ball's stock was owned by Ramo and 89 per cent of Ramo's stock was owned by Telecom. Although at the time of the sale, Red Ball had a substantial surplus in its treasury, Ramo had operated at a loss since TeleCom had acquired the majority of its stock in 1965, and its operations both before and after the sale depended on TeleCom's financial support.

This evidence was enough to justify the jury in concluding that notwithstanding the book entries and the testimony of Ramo's officers concerning Ramo's intention to repay, the consideration controlling repayment was the financial interest of TeleCom's stockholders, and that there was in fact no intention to repay at the time the advances were made because such repayment would not be in the stockholders' interest. Consequently, appellants' first point is sustained.

b. Interpretation of Dividend Limitation.

Whether this finding is controlling on the ultimate issue of breach of the security agreement is a more difficult question. Appellees contend that Ramo's subjective and unilateral intent cannot control, and that in the absence of a formal declaration of a dividend by Red Ball's board, appellees were required to show concurring intention on the part of Red Ball in order to overcome the legal implication of an obligation to repay from the fact of the withdrawals and the book entries showing that they were treated as loans rather than as dividends.

We have difficulty in applying the concept of subjective intention to a corporation, which acts only by its board of directors and by its officers and agents within authority granted by the board. We are not sure that the intention of any of these individuals can be considered the intention of the corporation in the absence of any contemporaneous resolution, contract or authorized statement. The sounder approach is to determine in the light of the undisputed facts whether the advances were dividends within the terms of the security agreement as a matter of law. We hold that they were dividends as a matter of law, as appellants contend in their second and third points. The only possible fact issue is Ramo's intention, and that issue, if controlling, has been resolved in appellants' favor by the jury's finding, which we have held to be based on sufficient evidence.

We hold the advances to be dividends because of our interpretation of the dividend limitation. The obvious purpose of that provision was to maintain the financial strength of Red Ball so that in the event of default by Ramo the noteholders would be assured of collecting the balance of their notes by a trustee's sale of Red Ball's stock, which was pledged as security. The maintenance of Red Ball's financial strength depended in part on availability of working capital, which was assured at the time of the sale by a surplus of more than $2,250,000, much of which was in cash. Depletion of this surplus by dividends was forbidden by Section 7(e), which specifically prohibited any dividend that would reduce the capital and surplus of Red Ball and its subsidiaries below the aggregate capital and surplus as of March 31, 1968.

Instead of maintaining this surplus as working capital, Ramo immediately withdrew $1,500,000 for its own purposes and later caused Red Ball to pay out additional sums for Ramo's benefit, bringing the total to $2,272,375. Red Ball's need for these funds as working capital is shown by its borrowings from National Bank of Commerce of $200,000, from Bossier Bank & Trust Company of $250,000, and from TeleCom of $1,425,000, at interest running from 8 1/2 to 9 1/2 per cent. The surplus had come from profits earned under the English management, but after Ramo took over, Red Ball...

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4 cases
  • Ramo, Inc. v. English
    • United States
    • Texas Supreme Court
    • 19 Septiembre 1973
  • Voskamp v. Arnoldy
    • United States
    • Texas Court of Appeals
    • 12 Noviembre 1987
    ...later events had a reasonable relationship to the value of the stock when it was sold on April 20, 1979. See English v. Ramo, Inc., 474 S.W.2d 600, 610 (Tex.Civ.App.--Dallas 1971), rev'd on other grounds, 500 S.W.2d 461 Appellees next contend that the court erred in admitting evidence of th......
  • American Speedreading Academy, Inc. v. Holst
    • United States
    • Texas Court of Appeals
    • 24 Mayo 1973
    ...in this particular case although it does not deal directly with the merits of the cause. Cf. English v. Ramo, Inc., 474 S.W.2d 600, 611 (Tex.Civ.App., Dallas, 1971, error granted). Finding no error in the proceedings, the judgment of the trial court is in all things ...
  • Martin v. Allman
    • United States
    • Texas Court of Appeals
    • 17 Febrero 1984
    ...reversed and a different judgment rendered by a court of appeals on the basis of evidence excluded at trial. English v. Ramo, Inc., 474 S.W.2d 600, 606 (Tex.Civ.App.--Dallas 1971), reversed on other grounds, 500 S.W.2d 461. As this court observed in Litigants are entitled to rely on the tri......

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