Farley v. Henson

• Decision Date: 15 December 1993
• Docket Number: Nos. 91-1620,91-1621,s. 91-1620
• Citation: 11 F.3d 827
• Parties: Fed. Sec. L. Rep. P 98,005 Don FARLEY; Robert Mendenhall, Appellees, v. William R. HENSON, Jr.; Paul M. Henson; Bowes Lyon Resources Ltd.; National Transport Services, Inc., Defendants, Westark Specialties, Inc., Appellant. Don FARLEY; Robert Mendenhall, Appellees, v. William R. HENSON, Jr., Defendant, Paul M. Henson, Appellant, Bowes Lyon Resources Ltd.; National Transport Services, Inc.; Westark Specialties, Inc., Defendants.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 827

11 F.3d 827

Fed. Sec. L. Rep. P 98,005

Don FARLEY; Robert Mendenhall, Appellees, v. William R. HENSON, Jr.; Paul M. Henson; Bowes Lyon

Resources Ltd.; National Transport Services,

Inc., Defendants,

Westark Specialties, Inc., Appellant.

Don FARLEY; Robert Mendenhall, Appellees, v. William R. HENSON, Jr., Defendant, Paul M. Henson, Appellant,

Bowes Lyon Resources Ltd.; National Transport Services,

Inc.; Westark Specialties, Inc., Defendants.

Nos. 91-1620, 91-1621.

United States Court of Appeals Eighth Circuit.

Submitted Nov. 15, 1991.

Decided Dec. 15, 1993.

W. Asa Hutchison, Fort Smith, AR, argued (Gregory T. Karber and John D. Alford, on the brief), for Westark Specialties, Inc.

Alfred Love, Ozark, MO, argued, for appellant Henson.

Laurence L. Pinkerton, Tulsa, OK, argued, for appellee.

Before BOWMAN, Circuit Judge, HENLEY, Senior Circuit Judge, and BEAM, Circuit Judge.

BOWMAN, Circuit Judge.

Appellee Don Farley is the former proprietor of a trucking company called Hi-Way Express ("HWE"). Appellee Robert Mendenhall is the former proprietor of a trucking company named Transport Leasing, Inc. ("TLI"). In 1988 Farley and Mendenhall sold their companies to Bowes Lyon Resources, Ltd. ("Bowes Lyon"), which owned a third trucking company named National Transport Services ("NTS"). Prior to its acquisition by Bowes Lyon, NTS was largely owned by Bill Henson, Jr., and by one of the appellants, Paul Henson. These men, together with their father Bill Henson, Sr., owned and operated the other appellant, Westark Specialties, Inc. ("Westark"). Bowes Lyon consolidated HWE, TLI, and NTS into an operation also known as Hi-Way Express ("Combined Hi-Way").

This arrangement collapsed. Farley and Mendenhall filed suit in the District Court ¹ asserting claims under Arkansas common law; the Arkansas Securities Act, Ark.Code Ann. Secs. 23-42-101 to -508 (Michie 1987) ("ASA"); Sec. 12 of the Securities Act of 1933 ("1933 Act"), 15 U.S.C. Sec. 77l (1988); Sec. 10(b) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. Sec. 78j(b) (1988); and the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. Secs. 1961-1968 (1988) ("RICO"). The case proceeded to trial against Paul Henson and Westark. The jury found for Farley and Mendenhall on all of their claims and awarded Farley $1,600,000 in damages for common law fraud, $1,643,000 in damages for securities act violations, and $3,000 in RICO damages. Mendenhall was awarded $222,000 in damages for common law fraud, $126,110 in damages for securities violations and $3,000 in RICO damages. The District Court entered judgment in accordance with the jury verdict, and ordered Paul Henson and Westark jointly and severally liable for the amounts awarded. Paul Henson and Westark now appeal. ²

Westark argues (1) that the evidence was insufficient to support appellees' common law fraud and federal securities laws claims and (2) that the damages awarded on those claims were excessive and not supported by the evidence. Paul Henson does not appeal the jury's determination that he is liable, but joins Westark's challenge to the damages awarded to Farley and Mendenhall. Neither Henson nor Westark appeals any aspect of the judgment in favor of appellees on their RICO claims. We reverse the award of damages to Mendenhall on his securities laws claims and remand for a new trial on that aspect of his damages. In all other respects, we affirm.

I.

During the relevant events, Westark was almost completely owned by the Henson brothers. Bill Henson, Sr., owned one share of its stock, but also held irrevocable proxies to vote his sons' shares. Westark's board of directors was composed of Bill Henson, Sr., who served as its chairman; Paul Henson, who also served as Westark's president; Bill Henson, Jr., who was a vice president of the company and managed Westark's numerous investments; and David Ashby, who was Westark's controller and secretary-treasurer. The Henson brothers were also NTS's two major stockholders; Paul Henson was on NTS's board of directors and his brother was its chairman.

In the spring of 1987, Bill Henson, Jr., and Farley began to discuss a merger of NTS and HWE. Farley was told that, in addition to their ownership of Westark, the Henson family owned and operated NTS. Bill Henson, Jr., introduced Farley to Paul Henson, telling him that Paul was Westark's president and an owner of NTS. During these discussions (which lasted through the summer), Bill Henson, Jr., also travelled to Vancouver, British Columbia, to meet several directors of Bowes Lyon, a Canadian shell company that was listed on the Vancouver Stock Exchange, and to talk with Canadian investment firms that might be interested in underwriting an offering of Bowes Lyon stock. ³ These talks were fruitful and Bill Henson, Jr., became a director of Bowes Lyon on July 7, 1987, a position he held until early 1988 when he became its chairman.

A merger of NTS with Bowes Lyon was approved by Bowes Lyon's directors in August 1987. Events began to move quickly toward a public offering of Bowes Lyon stock on the Vancouver Stock Exchange. These plans included Bowes Lyon's acquisition of Westark. On November 13, 1987, the Hensons granted Bowes Lyon the "sole and exclusive option to acquire ... all of the issued and outstanding shares of Westark" in exchange for "an increase in the number of free trading shares, and resulting decrease in the number of escrowed shares, to be issued to [the Henson brothers] as consideration for Bowes' acquisition of [NTS]." Letter of Intent from Bowes Lyon Resources Ltd. to William R. Henson, Sr., William R. Henson, Jr., and Paul M. Henson (Nov. 13, 1987). [hereinafter "Westark Option"]. This exchange was to be made on the basis of one share of Bowes Lyon for each $1.46 of Westark's assets, "as determined by an independent evaluation of Westark." Id. Three days later, five Canadian brokers agreed to offer 1,000,000 Bowes Lyon shares on the Vancouver Stock Exchange.

The Henson brothers told Farley that the Bowes Lyon deal would include both NTS and Westark. During the Henson/Farley negotiations, Bill Henson, Jr., also began to talk with Mendenhall, who was told that the Hensons owned Westark, about merging TLI with NTS. Toward the end of November 1987 Farley and Mendenhall held a meeting with the Henson brothers during which Bill Henson, Jr., repeated his earlier representations. Several months later, Farley spoke with Bill Henson, Sr., and Henson told him the combination of HWE, Westark, NTS, and Bowes Lyon "was really going to be a good deal for everybody and [that] it was going to be a good way to build a big company and make a lot of money." Tr. Vol. II at 205. According to both Farley and Mendenhall, the Hensons' representation that Westark would be part of the Bowes Lyon combination was a central inducement for their ultimate agreement to sell their trucking businesses to Bowes Lyon.

As part of its normal procedure, the Vancouver Stock Exchange required Bowes Lyon to issue a Statement of Material Facts, containing an accurate and current portrayal of the company's affairs, as a prerequisite to the public offering of Bowes Lyon stock. The Statement of Material Facts was put into final form on January 20, 1988, and NTS began to receive money from stock purchases almost immediately thereafter. Almost as quickly NTS transferred $200,000 of this money to Westark, which used it to purchase Bowes Lyon stock. Bowes Lyon raised roughly $1.2 million from the public offering; the transferred sum represented almost one-sixth of its capital thus raised.

The terms for Bowes Lyon's purchase of TLI and HWE were largely settled in February 1988. Farley was offered employment as president and chief executive officer of Combined Hi-Way, $500,000 cash, and 2.6 million shares of Bowes Lyon stock valued at $1.15 per share. Mendenhall was promised a management position, 228,000 shares of Bowes Lyon stock valued at $1.15 per share, and $30,000 cash. Both Farley and Mendenhall were promised they would be freed from guarantees they had previously signed to underwrite their companies' financial obligations.

Later that month TLI moved into Combined Hi-Way's trucking facilities in Fort Smith, Arkansas. These facilities (valued at over $1,000,000) were actually owned by Westark, which allowed the Bowes Lyon subsidiary to use them without paying rent. Farley moved HWE into the building several months later, thereby bringing about the physical combination of the companies. Farley later questioned the Henson brothers about the state of Combined Hi-Way's books. Although the brothers repeatedly told Farley that all the records were present, Farley was unable to locate some of them.

Discrepancies in the books, and other unpleasant surprises, made Farley reticent about consummating the sale of HWE. He gave the brothers a new draft agreement, which they declined to accept. Instead they offered Farley options for 650,000 additional Bowes Lyon shares; 250,000 shares were to be optioned to him by Bowes Lyon and the remaining 400,000 shares by the brothers. The HWE sale was closed on September 20, 1988. The closing, with the Henson brothers and Farley present, was held at the office of John Alford, an attorney who, in the past, had represented the brothers, their father, Westark, and Combined Hi-Way. Farley received $500,000 cash at closing.

By this time the brothers owned seventy percent of Bowes Lyon's stock and were firmly ensconced in management positions within the company. Bill Henson, Jr., was chairman of its board of directors and Paul Henson was an officer.

In November 1988, Farley and Mendenhall attended a meeting of Bowes Lyon's board of directors where they learned, by means of an agenda that included the "Acquisition [of] Westark ... in total stock swap by December 1, 1988," that Westark was not part of Bowes Lyon. Bowes Lyon Board Meeting, Nov. 11, 1988, Agenda. Paul Henson explained this to...