Home Telephone Company v. Darley

• Decision Date: 28 February 1973
• Docket Number: No. DC 71-68.,DC 71-68.
• Citation: 355 F. Supp. 992
• Parties: HOME TELEPHONE COMPANY, Plaintiff, v. Lon DARLEY and Rex Darley, Defendants.
• Court: U.S. District Court — Northern District of Mississippi

355 F. Supp. 992

HOME TELEPHONE COMPANY, Plaintiff, v. Lon DARLEY and Rex Darley, Defendants.

No. DC 71-68.

United States District Court, N. D. Mississippi, Delta Division.

February 28, 1973.

COPYRIGHT MATERIAL OMITTED

Robert H. Weaver, Jackson, Miss., for plaintiff.

Ross L. Franks, Hernando, Miss., for defendants.

MEMORANDUM OPINION

KEADY, Chief Judge.

Invoking diversity jurisdiction, Home Telephone Company (Home), a Mississippi corporation, sues Lon Darley and Rex Darley (Darleys), Tennessee citizens, for alleged breach of fiduciary duties as former officers, directors and controlling stockholders of Home. The complaint charges that the Darleys caused Home to breach a merger agreement it had made with a major independent telephone system, Mid-Continent Telephone Corporation (Mid-Continent) of Hudson, Ohio, and seeks the recovery of the principal amount of the judgment ($238,028.97) heretofore obtained against Home by Mid-Continent in prior litigation, Mid-Continent Telephone Corp. v. Home Telephone Co., 319 F. Supp. 1176 (N.D.Miss.1970), plus accrued interest ($4,536.83) and attorney fees and costs ($19,345.19) incurred in that proceeding. In their answer denying liability, the Darleys assert that the decision not to carry out the merger agreement received the prior approval of Home's common stockholders and that its preferred stockholders suffered no loss by the decision. It is further asserted that Union Telephone Company (Union), as subsequent purchaser of the common stock from the Darley family, was before and at the time of purchase not only aware of the outstanding merger agreement but actively induced the Darleys to repudiate the agreement and sell the common stock to Union. The principal defense is that Union, the present owner of Home's entire common stock, would be unjustly enriched if Home is allowed to recover in this action, and that Home is accordingly estopped to complain of the breach of contract and ensuing losses.

The case has been submitted upon the record made in Mid-Continent's suit, supplemented by certain documentary exhibits. The court in deciding that case made extensive findings of fact narrating the making by Home on November 15, 1968, of the merger agreement with Mid-Continent and subsequent events culminating in the repudiation of that contract on March 19, 1969. While all such findings are incorporated herein by reference, only a portion will be restated. The issue of the Darley's personal responsibility to Home was left open by the court since Home sought no relief, by way of cross-claim, against the Darleys, also defendants in the Mid-Continent case.¹

Prior to March 19, 1969, Home's entire common stock (2000 shares) was owned by the Darley family as follows: Lon Darley, 1490 shares, Rex Darley, son of Lon Darley, 360 shares, Lon Darley, Jr. and Howard Darley, also sons of Lon, and Ben Mitchell, stepson of Lon, 50 shares each. Home had also issued and outstanding 398 shares of $10 par value 5% preferred stock, representing a total investment of $3,980; these shares were, and continue to be, held by 43 different individuals who resided in different states and most of whom were not related to the Darley family. The preferred stock as originally issued was non-callable and non-voting but by a 1956 charter amendment became voting shares.

Lon Darley as president and majority stockholder controlled and dictated the affairs of the company; his son Rex was Home's vice-president and active in management; Rex's wife Jacqueline was secretary, and Lon's wife Lulah was treasurer. Home had 5 directors: Lon, Rex, Thomas Doddridge, Jimmy D. Young, both Home employees, and William W. Kerr, the local banker. When Lon on behalf of Home negotiated the merger agreement with Mid-Continent, the directors were advised and acquiesced in the transaction. The common stockholders were notified and informally assented. No contact was made, however, with the preferred stockholders, nor their approval sought. Both Mid-Continent and the Darleys regarded the preferred stock as an interest not sufficiently substantial to affect the plan of merger.

Following the execution of the merger agreement, Home's common shareholders, at a meeting held January 20, 1969, reelected Rex and Kerr as directors and elected as new directors James W. Woods, Home's attorney, M. C. Herrington and Ray Magee, local citizens. The new directors, who were selected by Lon Darley, were apprised of the impending merger. There was no change in Home's officers until April 15, 1969— after the stock sale to Union had been consummated—when the Darleys resigned their offices; and Rex was elected president, Doddridge vice-president and Clarke M. Williams, Union's top executive, secretary and treasurer. Rex Darley was employed as Home's general manager for a term of ten years at $18,000 annual compensation by formal contract with CT&E, Union's parent.

The factors which motivated Lon and Rex Darley to cause Home to repudiate Mid-Continent's merger agreement are as follows:

"Thereafter, Williams, a person of large net worth, met with Lon and Rex Darley in Memphis on February 28 and offered to purchase Home's common stock for approximately $1,650,000 cash. At this meeting Lon Darley advised Williams that it would take $2,000,000 cash to purchase the stock. Lon Darley calculated this would be the cash equivalent of the Mid-Continent offer plus about $600,000 for payment of capital gains taxes. Williams knew, or had reason to know, that Home had entered into a merger agreement of some nature with Mid-Continent but he did not at any time inquire of the Darleys as to its status, or otherwise investigate the situation.

"On March 10 Williams made a firm $2,000,000 cash offer for Home's common stock and delivered to Lon Darley his personal check for $100,000 to bind the deal. At this juncture the Darleys advised Williams that a merger agreement had been signed with Mid-Continent and they needed to obtain a legal opinion from their counsel regarding its obligatory effect before responding to his offer. Williams made no move to check into the matter. It was approximately at this time that Home's attorneys, who were unaware of the Williams offer, had received the draft of the reorganization plan from Mid-Continent's attorneys and were requested by Lon Darley to give an opinion as to its enforceability. The Darleys offered to show Williams a copy of the November 15 agreement, but Williams declined to make such examination, stating that the less he knew about it the better. At this same meeting the Darleys told Williams that it was possible that Mid-Continent would sue if Home's stock were sold to him.

"The Darleys decided to accept the $2,000,000 cash offer from Williams and the funds were paid over to Home's common stockholders on or about March 24, 1969, when the 2000 shares of Home's common stock, duly endorsed, were delivered to Williams by all the Darleys. The stock was actually transferred to Union, a Mississippi corporation which had been organized by Williams for the sole purpose of receiving the stock. At the same time, Rex Darley executed a management employment contract with CT&E, Union's parent, for a ten-year period at an annual salary of $18,000. These transactions completed the sale of Home's stock to Union, which ignored all subsequent demands of Mid-Continent that the November 15 agreement had been breached by the Darleys and that Mid-Continent had the right to compel performance from not only the Darleys but Williams and Union." 319 F.Supp. 1186-1187.

When Lon Darley decided that it was to the financial interest of himself and his family to accept Union's cash offer rather than enter into the stock exchange, neither he nor Rex notified the preferred stockholders or the other directors of Home of their decision that Home should breach the merger agreement. Although this decision was disclosed only to Darleys' attorney, Lon nevertheless had authority from Rex and the other common shareholders to act as he saw fit in disposing of their stock. After the stock sale to Union, Rex Darley served as Home's president and general manager until January 20, 1970. At that time CT&E bought back Rex's long-term employment contract as general manager, paying him $90,000 in a lump sum, and Rex resigned his positions as director of Home and as vice-president of CT&E.

After Union became Home's sole common shareholder, various meetings of the new board of directors were held for transacting company business. This included resolutions ratifying Rex's employment as general manager in accordance with prior contract made by CT&E, borrowing $2,000,000 for the purchase of central office equipment, amending by-laws to increase the number of directors from 5 to 7 and provide additional offices. These directors' meetings took place at different times throughout the year 1969; on December 23, 1969, Home's stockholders, both common and preferred, met and ratified the directors' actions in borrowing $2,000,000 and amending by-laws. On September 16, 1970, Home's stockholders met again, this time to amend the by-laws to increase the number of directors from 7 to 8. At no time did the stockholders vote on the acts of the Darleys in withdrawing from the merger; the first action of Home's directors occurred December 16, 1970, when it was voted to sue Rex and Lon Darley for the damages recovered by Mid-Continent.

Mid-Continent's suit, filed May 5, 1969, terminated in judgment September 28, 1970, against Home for $218,000 as damages allowed to Mid-Continent from Home's wrongful breach of contract. This figure was determined to be the difference between Home's asset market value of $1,650,000 and 64,000 Mid-Continent shares worth $1,432,000. This judgment on November 23 was amended by assessing Home with additional damages of $20,028.97 representing accrued interest since March 19, 1969. This total judgment ($238,028.97), plus $4,536.83 post-judgment interest, was...