Lane v. Peterson

• Decision Date: 22 July 1985
• Citation: 851 F.2d 193
• Parties: Clift C. LANE, Individually and as Trustee under the Clift C. Lane Revocable Trust and as Trustee under the Dorothy P. Lane Trust, and Dorothy P. Lane, Individually, and as Trustee under the Dorothy P. Lane Revocable Trust and as Trustee under the Clift C. Lane Trust, Appellees, v. John E. PETERSON, Jr., Walter W. Minger, and Edward H. Covell, each Individually, and as Members of the Special Panel for the Lane Processing, Inc., under a Consolidated Plan of Reorganization for Clift C. Lane and Dorothy P. Lane and Land Affiliates as filed with the United States Bankruptcy Court for the Middle District of North Carolina, Greensboro Division, and as Trustees under a Declaration of Trust dated
• Court: U.S. Court of Appeals — Eighth Circuit

Page 193

851 F.2d 193

11 Fed.R.Serv.3d 767

Clift C. LANE, Individually and as Trustee under the Clift

C. Lane Revocable Trust and as Trustee under the Dorothy P.

Lane Trust, and Dorothy P. Lane, Individually, and as Trustee under the Dorothy P. Lane Revocable Trust and as Trustee under the Clift C. Lane Trust, Appellees, v. John E. PETERSON, Jr., Walter W. Minger, and Edward H.

Covell, each Individually, and as Members of the Special

Panel for the Lane Processing, Inc., under a Consolidated

Plan of Reorganization for Clift C. Lane and Dorothy P. Lane

and Land Affiliates as filed with the United States

Bankruptcy Court for the Middle District of North Carolina,

Greensboro Division, and as Trustees under a Declaration of

Trust dated July 22, 1985, and John E. Peterson, Jr.;

Walter W. Minger; and Edward H. Covell, as Representatives

of the unknown Beneficiaries under a Declaration of Trust

dated July 22, 1985, Appellants.

Nos. 87-2073, 87-2366.

United States Court of Appeals,

Eighth Circuit.

Submitted Jan. 11, 1988.

Decided June 30, 1988.

Rehearing Denied Aug. 2, 1988.

As Amended Oct. 4, 1988.

Charles Hlavinka, Texarkana, Tex., for appellants.

Ronald A. May, Little Rock, Ark., for appellees.

Before JOHN R. GIBSON and MAGILL, Circuit Judges, and BRIGHT, Senior Circuit Judge.

JOHN R. GIBSON, Circuit Judge.

Clift and Dorothy Lane, after serious business reversals and bankruptcy, transferred the stock in their several corporations to a panel established by their reorganization plan. The panel, John Peterson, Jr., Walter W. Minger and Edward H. Covell, sold the stock for $35 million less than one year after the transfer, and the Lanes filed this diversity action seeking to recover the stock or participate in the sale proceeds. Following a five-day bench trial, the district court ¹ denied all relief. On appeal, the Lanes argue that the district court erred in failing to impose a constructive trust on the sale proceeds. Peterson, Minger and Covell cross-appeal, arguing that the court erred in failing to impose Rule 11 sanctions against the Lanes. We affirm the judgment entered by the district court and the denial of sanctions.

The Lanes, devoted some 35 years to creating and developing their poultry business. They organized and were the initial subscribers to all of the stock of the "Lane Companies." ² In the early 1980's the Companies experienced severe financial problems and the Lanes and the Lane Companies filed petitions for reorganization under Chapter 11 of the United States Bankruptcy Code. A plan for reorganization approved by the bankruptcy court in July 1984 provided for the appointment of a Special Panel which was given the responsibility and authority to aid in the operations of the Lane Companies. If default occurred, the Panel would succeed to the powers and duties of the Companies' Board of Directors and the Companies would receive an additional 30-day cure period.

The Lanes selected Peterson, Minger and Covell to serve on the Special Panel. Following their appointment, the Lanes continued to operate the Companies. The Panelists performed their duties as specified in the plan, recommending several changes to the Lanes regarding the operations of the Companies, but the Lanes rejected their advice.

From the confirmation of the plan through June 1985 the Companies' losses escalated. By the end of June the stockholders' equity in the Companies fell to a negative $8.2 million, with losses for the last twelve months exceeding $8.9 million. ³ In early July 1985 it became apparent that the Companies could not meet the scheduled payments under the plan and that default, which would occur on August 2, 1985, was inevitable. Because the Lanes had executed personal guarantees to secure much of the needed capital for operations, personal assets of the Lanes, valued at more than $1 million would be subject to creditors' claims. In a letter dated July 5, William Sullivan, counsel for the Lanes and the Lane Companies, advised the Lanes that it would be in their "personal financial interest to turn the Companies over to the Special Panel in the best condition possible so that the Special Panel would have a chance to avoid liquidation." Dorothy Lane suggested to Peterson that if she and Clift could be released from the personal guarantees, they would relinquish control of the Companies. The Lane Company creditors considered, but rejected, this proposal in the early part of July.

The Special Panel and the Lanes met on July 2, 1985, to discuss cash flow problems, as well as Notices of Default received by the Lanes. Dorothy Lane testified that after the meeting, she and Peterson secretly met to discuss a proposed transfer of stock and managerial responsibility to the Panel. She testified that Peterson assured her that the Panel "did not want her money" and that the stock, if transferred, would be held for her and Clift as beneficial owners. Dorothy Lane told no one, including her husband, about this alleged agreement. Peterson denied that he told Mrs. Lane that the stock would be held for the Lanes as beneficial owners. The district court specifically found that Dorothy Lane's testimony lacked credibility.

On July 17, 1985, the Panel met and agreed that they would accept an early takeover of the Companies, as requested by the Lanes, if the Lanes relinquished all control and power in the Companies, including a transfer of all their stock. ⁴ The Panel conveyed their proposal to Sullivan, who immediately contacted Dorothy Lane. While the Panel was still meeting, Sullivan relayed the Lanes' acceptance of the proposal.

The initial proposal was to "turn the stock back to the Companies." However, after assessing the ramification of such a transaction, Sullivan realized that the Companies could not operate without outstanding stock. Thus, Sullivan suggested transferring the stock to the Panelists as trustees under a Declaration of Trust for the benefit of the Lane Company employees. This idea was not conveyed to the Lanes.

Sullivan prepared the necessary documents to execute the transaction and the agreement was formalized at the Company offices on July 22, 1985. Sullivan explained each document to the Lanes who had the opportunity to ask any questions. ⁵ The Lanes resigned as officers and directors of each of the corporations and Peterson, Minger and Covell were elected to these positions. A consulting agreement executed between the Lanes and the Lane Companies provided each of the Lanes with $100,000 in return for a one-year consulting arrangement. The Lanes executed a Stock Transfer agreement transferring their stock to the Panelists as trustees under a Declaration of Trust. The Declaration of Trust was executed only by Peterson, Minger and Covell. Peterson denied the Lanes' request to see a copy of the trust instrument "because it did not pertain to the Lanes and it was not a document they needed to review or sign." After the closing Dorothy Lane stated, "better that the Companies go down with you than with us." The Lanes were provided with a press release reflecting that they had relinquished "total control over the corporate stock and other assets."

The Panelists then acted decisively and vigorously. They abandoned a product line and streamlined operations and management. They shut down one plant and increased operations at others. The Panel negotiated with creditors who agreed to reduce some of their claims. The Panel implemented a quality control plan as well as a marketing plan. Cash flow stabilized as a result of a contract the Panel negotiated with Tyson Foods. Quality and efficiency improved. The Panel sold one of the divisions for a $3 million profit. In addition, the poultry market stabilized and prices increased about 2 cents per pound from June 1985 to March 1986. Chicken feed costs declined and this decreased the expenses.

In May 1986 the Panel, acting as trustees under the trust, sold the Lane Companies stock to Tyson Foods, Inc. for $35 million. Following news of the sale, the Lanes brought suit seeking to rescind their agreement and assume control of the assets, or in the alternative to share in the sale proceeds. The district court denied all relief to the Lanes finding that: (1) the Panel members did not breach any fiduciary duties owed to the Lanes; (2) there was no fraud or other inequitable conduct on the part of the Panel; (3) the transaction, as consummated, reflected the agreement of the parties; (4) adequate consideration existed to support the agreement; and (5) the agreement was not unconscionable. Based on these findings, the court concluded that the Lanes failed to prove that a constructive trust should be imposed on the sale proceeds. On appeal, the Lanes do not attack the district court's interpretation of Arkansas law; instead, they urge that the court's factual findings are incorrect. ⁶ We review findings of fact under the clearly erroneous standard, giving due regard to the opportunity of the district court to judge the credibility of witnesses. Anderson v. Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985) (interpreting Fed.R.Civ.P. 52(a) ). Findings are clearly erroneous if a review of the record as a whole inspires a "definite and firm conviction" that the finding was a mistake. Id. We note that when a district judge's findings are based on his decision to credit the testimony of one of two or more witnesses, each of whom has told a coherent and facially plausible story that is not contradicted by extrinsic evidence, that finding, if not internally inconsistent, can virtually never be clear error. Id. at 575-76, 105 S.Ct. at 1512-13.

I.

A constructive trust is an equitable remedy which may be imposed if it is shown by clear, cogent and convincing evidence that property is acquired by fraud or breach of a fiduciary duty. Bramlett v. Selman, 268 Ark. 457, 597 S.W.2d 80, 84-85 (1980); Horton v. Koner, 12 Ark.App. 38, 671 S.W.2d 235, 238 (1984)....