Johnston v. Wilbourn
| Decision Date | 11 January 1991 |
| Docket Number | Civ. A. No. E87-0074(L). |
| Citation | 760 F. Supp. 578 |
| Parties | Jessie L. JOHNSTON, Sarah Johnston and Fred F. Johnston, Jr., Plaintiffs, v. Richard WILBOURN, Archie McDonnell, Sr., Archie McDonnell, Jr., Citizens National Bank and the Stonewall Bank, Defendants. |
| Court | U.S. District Court — Southern District of Mississippi |
William E. Ready, George L. Follett, Meridian, Miss., James C. Martin, James R. Mozingo, Stennett, Wilkinson & Ward, James E. Becker, Jr., Michael O. Gwin, Watkins & Eager, Jackson, Miss., for plaintiffs.
R.B. Deen, Jr., Deen, Cameron, Pritchard, Young, Kittrell & Loeb, Meridian, Miss., Charles K. Reasonover, Robert E. Kerrigan, Jr., Duris L. Holmes, Charles P. Carriere, III, Deutsch, Kerrigan & Stiles, New Orleans, La., Arlo Temple, Meridian, Miss., for defendants.
This cause is before the court on the motion of defendants Richard Wilbourn, Archie McDonnell, Sr. and Archie McDonnell, Jr. and the separate motion of defendants Citizens National Bank and Stonewall Bank for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. Plaintiffs Jessie L. Johnston, Sarah Johnston and Fred F. Johnston, Jr. have responded to the motions and the court has considered the memoranda of authorities together with attachments submitted by the parties.
This case involves a sale by plaintiffs of their shares of Stonewall Bank stock to defendants Wilbourn, McDonnell, Sr. and McDonnell, Jr. Plaintiffs allege that defendants violated federal securities laws, specifically Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, in connection with their purchase. In addition, plaintiffs have asserted state law claims against defendants for fraud and breach of fiduciary duties. The following facts, as revealed by the parties' statements of undisputed material facts submitted in accordance with Local Rule 8(d), are undisputed.
In 1977, McDonnell, Sr. and Wilbourn purchased 362 (52%) of the 700 outstanding shares of Stonewall Bank common stock, for $714 per share, each purchasing one-half. At the time of their purchase of Stonewall Bank stock, McDonnell, Sr. and Wilbourn were minority shareholders and directors of Citizens National Bank of Meridian. McDonnell, Sr. was also president of Citizens National. From 1977 to 1987, McDonnell, Sr., Wilbourn and McDonnell, Jr. were members of the board of directors of Stonewall Bank; McDonnell, Sr. remained president of Citizens National Bank and was also president of Stonewall Bank; he was, as well, chairman of the boards of directors of both banks. Wilbourn was a vice-president of Stonewall Bank and acted as legal counsel for both banks. McDonnell, Jr. made investments for Stonewall Bank and managed Stonewall Bank for a period of time.
When they purchased the Stonewall stock in 1977, Wilbourn and McDonnell, Sr. entered into an agreement between themselves, entitled Agreement to Purchase Stock of The Stonewall Bank (the buyout agreement), under the terms of which each agreed that he would not dispose of his one-half of the 52% of the Stonewall Bank stock without first offering it to the other. The purpose of the agreement was for McDonnell and Wilbourn to avoid ever holding a minority interest in Stonewall Bank. The agreement established a buyout price at 1.19 times book value, the price which McDonnell and Wilbourn had paid for the majority interest in 1977.
Prior to 1977, the Stonewall Bank had experienced financial problems, but following 1977, earnings were increased from approximately $7000 to more than $100,000 annually. In 1985 and 1986, however, a number of other problems arose. In 1985, the Southeast Bank moved a branch outside of Stonewall. This was seen as a threat because Stonewall Bank was small and did not appear to be able to grow as an independent bank in the markets it was serving from its existing locations. The home office and domicile of Stonewall Bank were, therefore, moved to Quitman with a branch office remaining in Stonewall. Due to the added expense of the Quitman office, competition in the markets and slow growth of the Quitman deposits, earnings began to decrease. Around the same time, Stonewall Bank's vice-president and manager resigned, and during the period between his resignation and the hiring of a new bank manager, it was learned that there were some inefficiencies and questionable loans which required special collection efforts.
According to defendants, as a result of the problems which had arisen, Wilbourn became concerned with the buyout agreement; he did not want to be faced with buying control of Stonewall Bank at a price of 1.19 times book value if anything should happen to McDonnell, Sr., nor did he want to risk becoming a minority shareholder or risk having to manage Stonewall Bank if he exercised the option. Thus, from time to time prior to 1986, Wilbourn suggested to McDonnell, Sr. that they approach Jessie Johnston and attempt to purchase a block of 258 shares of Stonewall Bank stock owned by the Johnston family.1 In May 1986 McDonnell agreed and on May 20, 1986, the two approached Jessie Johnston regarding purchasing her family's stock.2 On that date, they met with Jessie Johnston at her home in Enterprise and offered to pay Mrs. Johnston $1000 per share for her stock. Mrs. Johnston, defendants state, was pleased with the offer and indicated that she would discuss it with her son, Fred Johnston, Jr. Plaintiffs dispute that Mrs. Johnston was pleased with the offer, but agree that she indicated she would discuss the offer with her son.
Subsequent to the May 20 meeting, additional meetings were held with Fred Johnston, Jr. in Meridian to discuss the purchase of the Johnston stock. On July 12, 1986, McDonnell, Jr. and Wilbourn met with Fred Johnston, Jr. and his son, Clayton. McDonnell, Jr. attended the meeting at the request of his father, who was out of town at that time. A subsequent meeting was held on September 20, 1986 between McDonnell, Sr., McDonnell, Jr., Wilbourn and Fred Johnston, Jr. At these meetings, Dr. Johnston insisted on receiving a price for the stock greater than book value and requested that a letter be written to his mother setting forth any such offer but not restating the substance of their discussions. Although they rejected the idea that the stock was worth more than book value to them at that time, McDonnell, Sr. and Wilbourn agreed to offer Mrs. Johnston $1100 per share, and on October 23, 1986, a letter was mailed to Mrs. Johnston offering to pay her $1100 per share plus the 1986 dividends for the stock. Mrs. Johnston, on November 7, 1986, rejected the offer and asked for $1500 per share. On November 12, 1986, Wilbourn declined this offer. After the deadline for the original offer had expired and Wilbourn and McDonnell, Sr. had rejected plaintiffs' counteroffer, Fred Johnston attempted further to negotiate a price higher than $1100 per share. When a higher price was refused, the Johnstons offered to sell their stock for $1100 per share; the parties further agreed that Mrs. Johnston would retain two shares in order to remain on the Stonewall Bank Board.3
Prior to November 20, 1986, McDonnell, Sr. offered McDonnell, Jr. the opportunity to purchase one-half of the Johnston stock. McDonnell, Jr. agreed and on or about November 19, entered into a verbal agreement with his brother, John, whereby each would purchase one-fourth of the stock.4 On November 20, McDonnell, Sr. and McDonnell, Jr. traveled to Enterprise to deliver the checks for the stock. The checks were drawn on the accounts of Wilbourn and McDonnell, Jr., with McDonnell, Jr. being reimbursed for his brother's one-fourth of the shares on the same date. On November 20, Wilbourn and McDonnell, Sr. also sent a letter to the remaining Stonewall Bank stockholders offering to purchase their shares for the same price, $1100 a share.
On the following day, November 21, 1986, McDonnell, Sr. requested that McDonnell, Jr. inquire into the regulatory and legal requirements for a merger between Citizens National Bank and Stonewall Bank. Sometime between November 21 and December 1, 1986, McDonnell, Jr. received a packet of merger application materials from the Office of the Comptroller of the Currency (OCC) in Atlanta and began studying the merger requirements. It was first necessary to propose a merger to the Citizens National Bank board of directors. McDonnell, Jr. began drafting an agreement to merge. On or about December 1, it was decided that the agreement to merge would be drafted on a stock-for-stock exchange based on 13.02 shares of Citizens National Bank stock for one share of Stonewall Bank stock; this represented a book-for-book exchange which was based on the rate used in a previous merger between Citizens National Bank and The Macon Bank. Rough drafts of an agreement to merge were prepared on that basis. However, on December 4, 1986, McDonnell, Sr. suggested to Wilbourn a change in the ratio, and ultimately, the proposed agreement to merge included an exchange rate of seventeen shares of Citizens National Bank stock for each share of Stonewall Bank stock.5 Also on December 4, 1986, McDonnell, Sr. and Wilbourn entered into a "memorandum of agreement" in which they agreed to use their best efforts to bring about a merger; this agreement replaced their original buyout agreement.6
The Agreement to Merge was presented to the Citizens National Bank board of directors on December 9, 1986; the eight-member board unanimously approved the proposal. Thereafter, on December 11, 1986, the Stonewall Bank board of directors, including plaintiff Jessie Johnston, unanimously approved the agreement to merge. After the agreements were signed, McDonnell, Jr. began preparation of proxy materials with the assistance of legal counsel. The merger application was filed on January 21, 1987, and a conditional...
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