First Commercial Bank, N.A. v. Walker, 96-1495

• Decision Date: 30 April 1998
• Docket Number: No. 96-1495,96-1495
• Citation: 969 S.W.2d 146,333 Ark. 100
• Parties: FIRST COMMERCIAL BANK, N.A. v. Michael W. WALKER, Aearth Development, Inc., Aearth Preparation, Inc., and Coal Processors, A Joint Venture
• Court: Arkansas Supreme Court

Page 146

969 S.W.2d 146

333 Ark. 100

FIRST COMMERCIAL BANK, N.A. v. Michael W. WALKER, Aearth Development, Inc., Aearth Preparation, Inc., and Coal Processors, A Joint Venture

No. 96-1495.

Supreme Court of Arkansas.

April 30, 1998.

Barber, McCaskill, Jones & Hale, P.A. by Glenn W. Jones, John S. Cherry and Joseph F. Kolb and Williams & Anderson by Philip S. Anderson, Leon Holmes and Katharine R. Cloud, Little Rock, for appellant.

The Burk Law Firm by Michael G. Burk, Austin, Walker & Black by Kendell R. Black, Little Rock, and James E. Burk, Washington, DC, for appellees.

THORNTON, Justice.

Plaintiffs, Michael W. Walker, Aearth Development, Inc. (Aearth), Aearth Preparation, Inc., and Coal Processors, brought the underlying lender-liability action, asserting that wrongful actions of defendant, First Commercial Bank and its predecessors (the Bank), caused the failure of plaintiffs' coal mining, processing, and sales business in the Arkansas River Valley. This is the second appeal involving the disposition of these issues. The first appeal followed the chancery court's judgment in favor of the Bank on all allegations after a twelve-day trial. On appeal, the jurisdiction of the chancery court was challenged, and we determined that the lower court erred in transferring the case from circuit court to the chancery court because Individual plaintiff Michael Walker was a principal stockholder in Aearth, which formed a wholly owned subsidiary, Aearth Preparation, Inc. Aearth entered into a joint venture with other parties to form Coal Processors. We refer jointly to Aearth Development, Inc., Aearth Preparation, Inc., and Coal Processors as "the Aearth business entities." Aearth held a 75% interest in Coal Processors, and the remaining 25% was acquired by George Locke, who is not a party to this proceeding. In addition to being a stockholder and officer of Aearth, Mr. Walker was a guarantor of notes executed by the Aearth business entities to obtain funds from the Bank and other sources of credit.

                the chancery court lacked subject-matter jurisdiction.  See Walker v. First Commercial Bank, 317 Ark. 617, 880 S.W.2d 316 (1994) (Walker I ).   We reversed and remanded with instructions to transfer the case to circuit court, without binding the circuit court on any issue decided by the chancellor
                

At trial in the circuit court, the Bank challenged the standing and capacity of plaintiffs as a threshold matter, and also urged the court to declare that all of plaintiffs' claims were barred on principles of judicial estoppel because those claims were not asserted during prior bankruptcy proceedings. Over the Bank's objections, issues of fraud, conversion, and tortious interference with contractual relations were presented to the jury, which returned a $22.5 million verdict. The court reduced this verdict by a set-off that the court determined to be greater than $7.3 million, which, together with a remittitur of $7 million from the award of punitive damages, resulted in a verdict of $8.2 million.

From this order, the Bank appeals and plaintiffs cross-appeal, together asserting seventeen claims of error. We have determined that the Aearth business entities did not have the capacity to bring the action for "lender liability" and that Mr. Walker did not have standing to pursue, either as a stockholder or guarantor, the same causes of action asserted by the Aearth business entities. Accordingly, we reverse and dismiss.

FACTUAL BACKGROUND

Mr. Walker formed Aearth Development, Inc., in 1978. Aearth entered into a joint venture with Russell Mining Company of Kansas. At the time of this joint venture, Mr. Walker owned 40% of Aearth, and the balance of the stock was held by three other persons. Some coal was produced and sold, primarily to charcoal markets. In early 1980, Russell Mining withdrew from the joint venture. At that time, Aearth owned a small bulldozer, a front-end loader, and a scraper, and depended on contractors to provide their own equipment. Aearth had not yet made a profit from its operations. An overseas purchaser expressed an interest in Arkansas coal, but the coal had a high sulfur content with sulfur in the form of pyretic sulfur or "fools gold," which often prevented the raw product from meeting the requisite specifications.

Aearth sought development capital to enhance the quality of its product in order to compete in the market place. In December 1980, Mr. Walker engaged the investment firm of Collins, Locke, and Lasater to assist in obtaining a target of $10,000,000 in development financing. One of the principals of the firm, George Locke, became personally interested in the enterprise. On December 16, 1980, Mr. Locke persuaded the Bank to grant Aearth, which had virtually no working capital, a line of credit of $500,000, secured by the personal guarantees of Mr. Locke and Mr. Walker. By April 27, 1981, the full amount of the note had been advanced, and no repayments had been made on that note. Aearth's inventory and accounts receivable had been pledged as collateral to the Bank, and this security agreement was never terminated.

On May 20, 1981, Aearth, Mr. Locke, and Mr. Walker acquired a second line of credit from the Bank in the amount of $800,000. No repayments were made on this loan.

In June 1981, Aearth entered into a joint venture with Arkala Coal Company. This joint venture, Coal Processors, named Mr. Locke as managing agent. With Mr. Locke's assistance, the joint venture obtained two lines of credit from the Bank, aggregating an additional sum of $1,475,000 to be used in Notwithstanding promises made in several loan agreements with the Bank to refrain from entering into other loan agreements and encumbering assets and collateral already pledged to the Bank, Aearth, together with Mr. Locke and Mr. Walker, entered into two separate agreements with other creditors using some of the same assets as security. Aearth executed a note on December 23, 1981, in the amount of $716,000 to Bono, DiGiglia, and Levingston of Louisiana; however, only about $500,000 of this note was actually advanced. On January 9, 1982, Aearth also executed a security agreement pledging its assets to Taylor Machinery of Memphis as security for $662,667.36 that Taylor Machinery advanced to Aearth.

constructing a coal-washing facility. The notes for these lines of credit were signed by Aearth, Mr. Locke, and Mr. Walker, as well as by the principals of Arkala. These notes were fully advanced and were replaced by a single note, executed on November 30, 1981, by Coal Processors, Mr. Locke, and Mr. Walker, among others.

Additionally, on December 10, 1981, the Bank advanced to Coal Processors an additional $150,000. The note for this advance was due on March 10, 1982. Aearth executed another note to the Bank on April 9, 1982, for a $300,000 loan, which was due on May 10, 1982. By April, the Aearth business entities were in default on all loans except this note that was due on May 10, 1982, and the entities owed the Bank $2,925,000, plus interest.

On April 15, 1982, Aearth borrowed $272,000 from Dan Lasater, who personally borrowed this amount from the Bank, for the purpose of paying two past due installments on Coal Processors' $1,475,000 note to the Bank. Mr. Lasater's demand note to the Bank was due on or before May 14, and the Bank agreed to subordinate its right to any funds received from Aearth to Mr. Lasater. Aearth committed to Mr. Lasater that this debt would be paid from the first proceeds of a specified sale of coal, and Aearth instructed the broker for the purchaser of the coal that $272,000 of the proceeds were payable to Mr. Lasater.

While the Aearth business entities had also pledged proceeds from the sale of this coal to Taylor Machinery and other creditors, the specific instructions given by Aearth to the broker did not provide for any distribution of these funds to Taylor Machinery. When the $245,823.96 proceeds from the first sale were deposited in an escrow account at the Bank, the Bank applied these proceeds to Mr. Lasater's loan.

Taylor Machinery had become concerned about the repayment of its $662,667.36 advance, and on or about April 6, Taylor Machinery had drawn down a $300,000 line of credit from the Bank, reducing its exposure to about $360,000. Aearth had orally represented that some of the proceeds from the first sale of coal would be applied to Taylor Machinery's claims, and when these funds were not forthcoming, Taylor Machinery orally told Aearth to park the equipment pending some resolution of the financial problems. After several weeks, Taylor Machinery arranged to have its equipment picked up and returned to Memphis.

The Aearth business entities discontinued operations and filed Chapter 11 bankruptcy proceedings in November 1982. In December 1983, the bankruptcy court converted the Chapter 11 proceedings to a Chapter 7 liquidation. In May 1984, Mr. Walker filed a personal Chapter 7 bankruptcy petition.

STANDING AND CAPACITY OF THE PARTIES

We first consider whether, under principles of Arkansas law, plaintiffs had standing or capacity to bring an action for lender liability against the Bank. Plaintiffs argue that these issues are not preserved for our review. We disagree. The issue of standing and capacity was preserved by a timely motion for a directed verdict that was renewed at the conclusion of the case.

Plaintiffs argue further that the issues were resolved in Walker I, and that by determining that the chancery court did not have subject-matter jurisdiction, we decided these issues sub silentio and that plaintiffs have standing and capacity as a result of the law of the case and res judicata. This argument also lacks merit.

The doctrine of law of the case does prevent an issue raised and decided in the first appeal from being raised in a subsequent appeal. Bennett v. State, 308 Ark. 393, 825 S.W.2d 560 (1992). However, our decision in Walker I was predicated solely on the...