Latham v. Wells Fargo Bank, N.A.

• Decision Date: 23 March 1990
• Docket Number: No. 89-4432,89-4432
• Parties: 22 Collier Bankr.Cas.2d 846, Bankr. L. Rep. P 73,321 James A. LATHAM, Plaintiff-Appellant, v. WELLS FARGO BANK, N.A., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 979

896 F.2d 979

22 Collier Bankr.Cas.2d 846, Bankr. L. Rep. P 73,321

James A. LATHAM, Plaintiff-Appellant, v. WELLS FARGO BANK, N.A., et al., Defendants-Appellees.

No. 89-4432.

United States Court of Appeals, Fifth Circuit.

March 23, 1990.

J. Randall Keene, Shreveport, La., for plaintiff-appellant.

Kent Murdock, Scott R. Clark, Salt Lake City, Utah, for First Sec. Bank.

Richard S. Odom, Daniel D. Rodarte, Susan B. Hall, Brobeck, Phleger & Harrison, Los Angeles, Cal., Sidney E. Cook, James R. Jeter, Kenneth Mascagni, Joseph L. Hargrove, Jr., Glen L. Langley, Shreveport, La., for defendants-appellees.

Appeal from the United States District Court for the Western District of Louisiana.

Before HIGGINBOTHAM, SMITH, and DUHE, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

James A. Latham appeals the summary judgment entered in favor of Wells Fargo Bank, N.A. and First Security Bank of Utah, N.A., dismissing his lender liability claims against them on res judicata grounds. The district court held that since Latham's corporations, which were co-borrowers on the loan, had settled their claims against the banks in bankruptcy proceedings, and since Latham controlled these corporations in every aspect of their business, his claims against the banks were barred. We conclude that Latham's claims in this action are in part for injuries he suffered personally in his capacity as co-borrower and as guarantor of LEXCO's and LRC's indebtedness, rather than for injuries suffered as a shareholder from wrongs inflicted on his corporations. The trustees represented the corporations' claims in the bankruptcy proceeding, and Latham cannot now proceed as a shareholder on them; but his interests as a co-borrower and a guarantor were never placed before the bankruptcy court. Summary judgment on res judicata grounds was thus appropriate only for his claims as shareholder. We affirm the summary judgment only to the extent it barred those claims. We reverse the district court to the extent the summary judgment bars Latham's personal claims.

I

Latham was the sole shareholder of Latham Resources Corporation. LRC in turn owned all of the stock of other companies Latham controlled, including Latham Exploration Company, Inc. Through these subsidiaries, Latham engaged in contract drilling for oil, and in oil exploration and production. Latham was either the sole director or controlled the board of directors of each of these subsidiaries. He was also the president of LRC and LEXCO. While Latham conducted all of his business through these companies, he personally maintained title to some of the rigs and equipment they used.

In January 1982, LRC and its subsidiaries, as well as Latham personally, owed Marine Midland Bank approximately $9,000,000. They also owed First Security approximately $15,700,000. These debts were secured by drilling rigs and equipment, some of which were owned by Latham personally, some by the various companies, and some by Latham together with one or more of the companies. About this time, Latham decided to shift his operations' primary emphasis from contract drilling to exploration and production, having recognized that contract drilling was becoming unprofitable. The new emphasis on exploration and production meant that Latham's operations would require more financing than they had in the past. Wells Fargo convinced Latham it would be better able to handle these needs than his financier at the time. One immediate need was a new loan to enable the operations to retire their debts to Marine Midland and First Security.

On April 14, 1982, Latham and each of his companies entered into a Secured Credit Agreement with Wells Fargo and First Security, under which the banks loaned them approximately $27,434,000. Latham and the companies were co-obligors. The agreement's purpose was to refinance the existing indebtedness to Marine Midland and First Security and to provide Latham's operations with an additional $2,000,000 as working capital. As a condition precedent to the Credit Agreement, the banks required Latham individually and each of his companies to pledge certain of their separately owned assets to secure each other's obligation. This collateral consisted principally of chattel mortgages and security interests affecting drilling rigs owned by Latham personally and by his companies other than LEXCO. In his amended complaint, Latham alleged he personally provided 52% of this collateral, and that the total value of the collateral was far less than the amount of the debt. Latham also alleged the parties "understood and anticipated" that Latham and the companies would not be able to make the required principal payments in October 1982, and planned to revise the agreement at a later date.

The recession in the petroleum industry subsequently deepened, and the value of the collateral, particularly the drilling rigs, further declined. This recession also spurred Latham to accelerate his shift in emphasis to exploration and production. He set out to do this by using LEXCO to raise drilling dollars through limited partnerships, and by causing LEXCO to undertake exploration and development drilling in its own name. As part of this effort, LEXCO entered into a farmout agreement with Chevron in May 1982, under which it agreed to drill five Tuscaloosa trend wells in Point Coupee Parish, Louisiana in exchange for leasehold rights in the wells. LEXCO, through Latham, convinced several investors to provide equipment, services, or funds in exchange for "working interests" in LEXCO's leasehold rights upon completion. The investors provided mostly non-monied assets, which left LEXCO with a shortage of working capital.

The agreement required LEXCO to meet a strict drilling schedule and provided substantial liquidated damages if it did not. To keep from falling behind, LEXCO began work on the wells without sufficient funds to complete the job. In his amended complaint, Latham alleged that before LEXCO executed the Chevron contract, Wells Fargo and First Security also agreed to revise the Secured Credit Agreement and advance LEXCO sufficient funds to perform its obligation to Chevron. Latham alleged that these advances were to be secured by the leasehold interests, but that the advances were never made. LEXCO instead obtained a $2,000,000 loan from American Bank and Trust Company in New Orleans, secured by a mortgage on the first well completed. This still did not provide sufficient capital, primarily because when Latham asked Wells Fargo and First Security to subordinate their secured position, they agreed to do so only if LEXCO would apply a "substantial portion" of the American loan proceeds to the debt owed them. Latham alleged he agreed to this based on the banks' assurances that the Secured Credit Agreement would soon be amended and the banks would finally advance the funds they had promised LEXCO earlier.

The banks still had not advanced any money by January 1983, and Latham's operations began to encounter serious financial difficulties because LEXCO was unable to pay for the drilling and completion of the wells. Trade creditors began to file mechanic's and materialmen's liens against the wells. LEXCO nevertheless was able to complete the wells due in large part, Latham said, to the trade creditors' respect for him.

On April 28, 1983, the banks executed a commitment letter in which they committed to lend an additional $5,500,000 to Latham and the companies on certain conditions. In the amended complaint, Latham alleged he and the companies met each of the conditions the banks did not waive.

Pursuant to the letter, the banks entered into a third amendment to the Secured Credit agreement with Latham and the companies. The banks agreed to increase the loan by the $5,500,000 to which the letter referred. Latham and the companies were to use the proceeds to repay existing past due indebtedness, to pay liens, and for working capital. The amendment required LEXCO to pay the $3,500,000 interest on the past due indebtedness by assigning the banks a $6,529,852 production payment on the Tuscaloosa wells. The banks required Latham and his companies to secure this new advance, and the pre-existing indebtedness, with other collateral. This collateral included Latham's partnership interests in the LEXCO 82-2 program, and various other drilling programs. Finally, the banks agreed to release the collateral to the extent LEXCO elected to sell working interests in the wells. Latham alleged that the banks later refused to release the collateral.

On May 6, 1983, Wells Fargo executed another commitment letter in which it agreed either to lend Latham and the companies another $2,000,000 per Tuscaloosa well for completion costs or to subordinate its secured position to allow them to find other financing for those costs. According to the amended complaint, Wells Fargo did neither.

By September 1983, LEXCO owed its trade creditors more than $20,000,000 for labor, materials, and services furnished in the drilling and completion of the wells. The producing wells had generated several million dollars, but Chevron held these funds in escrow because of the liens LEXCO's trade creditors held on the wells. Chevron also refused to convey the leasehold rights to LEXCO and sued to terminate the farmout agreement because of these liens.

LEXCO filed for reorganization under Chapter 11 on October 17, 1983. The bankruptcy court appointed a trustee on the motion of Wells Fargo, First Security, and Chevron. In the fall of 1986, the bankruptcy court approved LEXCO's plan for reorganization, which included settlement of its claims against the banks. This plan was a joint plan for reorganization proposed by LEXCO's trustee and some of its creditors.

LRC later filed for bankruptcy under Chapter 7. On May 27, 1988, the bankruptcy court, pursuant to a request by the trustee for LRC, auctioned LRC's claims against the banks. A subsidiary partnership...