Lindley v. Mcknight

• Decision Date: 07 July 2011
• Docket Number: No. 02–09–00249–CV.,02–09–00249–CV.
• Citation: 349 S.W.3d 113
• Parties: Elizabeth Ann LINDLEY, not individually, but solely in her capacity as Independent Executor of the Estate of Nan Daws, Deceased, Appellant,v.J. Ross McKNIGHT, Paul Cowan, Pryor Cowan, Jeff M. Glazner, Janice A. Glazner, John E. Gray, Raelynn Gray, William T. Hannis, Kobye Hannis, Scott Harris, Linda Harris, William H. Henson, Dee Ann Henson, Edwin M. Hinson, Susan K. Hinson, Jack B. Horne, Carole Horne, Pascal J. Hosch, Joyce Hosch, Larry O. Hulsey, Gayle Hulsey, Donald R. Johnston, Teresa Johnston, Bobby King, Sue King, Mark Martin, Connie Martin, Roberta Monden, Mike Monden, James B. Myers, Leann Myers, Mike Parrack, Dorene Parrack, Charles Pribyla, Mona Pribyla, Geneva C. Rodgers, Scott W. Sewell, Gina E. Sewell, Tommy Sloan, Susan Sloan, Bill Sneed, Virginia Sneed, Ted Taylor, Sonja Taylor, James Sloan Thompson, Diane Thompson, Allen E. Turner, Navalleve Turner, James Bruce Waterfield, Sandra Waterfield, David A. Watson, Betty J. Watson, Throckmorton Bancshares, Inc., Olney Bancshares of Texas, Inc., Bryan Robertson Key, Candyce Caye Key, Joe Michael Bellah, Elizabeth Brown Bellah, Donnell Thomas Brown, Kelli Evans Brown, Todd Charles McCartney, Marianne Brown McCartney, R.A. Brown, Jr., Peggy Donnell Brown, Robert Alfred Brown, Talley Brown, A. Donald Chandler, Joy Cornelius Chandler, J.M. Chandler, Mary Gene Chandler, John Tarkington Schrampfer, Lerey Daws Coker Schrampfer, Nel Rey Daws Coker, Stanton Dow Liles, III, Greta Nelson Liles, Billie Gaskins McKnight, Wilma Opgenorth McKnight, Terrell Condron Redwine, Bettye G. Redwine, Ronnie Duane Capps, Trudy Capps, Mark McClelland, Gay L. McClelland, Jim Myers, Lemuel Kyle Yeates, Deborah Lynn Shelley, Tommy Boyd, Ladell Boyd, Don Ross Compton, and Margie Compton, Appellees.
• Court: Texas Court of Appeals

349 S.W.3d 113

Elizabeth Ann LINDLEY, not individually, but solely in her capacity as Independent Executor of the Estate of Nan Daws, Deceased, Appellant,

v.J. Ross McKNIGHT, Paul Cowan, Pryor Cowan, Jeff M. Glazner, Janice A. Glazner, John E. Gray, Raelynn Gray, William T. Hannis, Kobye Hannis, Scott Harris, Linda Harris, William H. Henson, Dee Ann Henson, Edwin M. Hinson, Susan K. Hinson, Jack B. Horne, Carole Horne, Pascal J. Hosch, Joyce Hosch, Larry O. Hulsey, Gayle Hulsey, Donald R. Johnston, Teresa Johnston, Bobby King, Sue King, Mark Martin, Connie Martin, Roberta Monden, Mike Monden, James B. Myers, Leann Myers, Mike Parrack, Dorene Parrack, Charles Pribyla, Mona Pribyla, Geneva C. Rodgers, Scott W. Sewell, Gina E. Sewell, Tommy Sloan, Susan Sloan, Bill Sneed, Virginia Sneed, Ted Taylor, Sonja Taylor, James Sloan Thompson, Diane Thompson, Allen E. Turner, Navalleve Turner, James Bruce Waterfield, Sandra Waterfield, David A. Watson, Betty J. Watson, Throckmorton Bancshares, Inc., Olney Bancshares of Texas, Inc., Bryan Robertson Key, Candyce Caye Key, Joe Michael Bellah, Elizabeth Brown Bellah, Donnell Thomas Brown, Kelli Evans Brown, Todd Charles McCartney, Marianne Brown McCartney, R.A. Brown, Jr., Peggy Donnell Brown, Robert Alfred Brown, Talley Brown, A. Donald Chandler, Joy Cornelius Chandler, J.M. Chandler, Mary Gene Chandler, John Tarkington Schrampfer, Lerey Daws Coker Schrampfer, Nel Rey Daws Coker, Stanton Dow Liles, III, Greta Nelson Liles, Billie Gaskins McKnight, Wilma Opgenorth McKnight, Terrell Condron Redwine, Bettye G. Redwine, Ronnie Duane Capps, Trudy Capps, Mark McClelland, Gay L. McClelland, Jim Myers, Lemuel Kyle Yeates, Deborah Lynn Shelley, Tommy Boyd, Ladell Boyd, Don Ross Compton, and Margie Compton, Appellees.

No. 02–09–00249–CV.

Court of Appeals of Texas, Fort Worth.

July 7, 2011.

Michael A. Barragan, Michael A. Barragan, P.C., Dallas, for Appellant.Davison Rugeley, L.L.P. and D. D'Lyn Davison, Wichita Falls, for Appellees.PANEL: LIVINGSTON, C.J.; McCOY and MEIER, JJ.

OPINION

TERRIE LIVINGSTON, Chief Justice.

In five issues, appellant Elizabeth Ann Lindley, not individually, but solely in her capacity as independent executor of the estate of Nan Daws, deceased (Lindley), appeals the trial court's final judgment in favor of appellees J. Ross McKnight, Throckmorton Bancshares, Inc. (Throckmorton), Olney Bancshares of Texas, Inc. (Olney), and the remaining appellees listed above. Lindley contends that the trial court erred by denying her motion for summary judgment, granting appellees' motions for summary judgment, making allegedly incorrect rulings on the parties' objections to summary judgment evidence, and awarding more than $200,000 in attorney's fees to appellees. We affirm.

Background Facts

Throckmorton and Olney are holding companies that purchase and own affiliated or unaffiliated banks. McKnight is the chairman of the board and president of Throckmorton, and he is the president of Olney. He owns stock in both corporations. Daws was one of the initial shareholders of Olney (investing $25,000), which was formed to acquire the First National Bank of Olney and later acquired seven other banks. She also owned significant stock in Throckmorton, which owns only the First National Bank of Throckmorton. Lindley is Daws's niece.

McKnight and Daws are distant relatives. Daws's husband, Jim Bob, was once the chairman of the First National Bank of Throckmorton. McKnight has lived in the city of Throckmorton his entire life except when he attended college. He was raised next door to the Dawses and lived close to them until he went to college. He considered them to be friends.

In 1996, Throckmorton and Olney considered conversions to S corporations.¹ In November of that year, McKnight sent a letter to Olney's shareholders stating that to complete the conversion, they needed to all agree to it through an IRS election form and a shareholders' agreement.

The Throckmorton shareholders' agreement, which was revised and approved by the corporation's attorney, Richard Dale Craig, contains the following provisions, among others:

SHAREHOLDERS AGREEMENT

THIS AGREEMENT made effective the 1st day of January, 1997, by and among Throckmorton Bancshares, Inc., a Texas corporation (the “Corporation”) and the undersigned shareholders of the Corporation and their respective spouses (the “Original Shareholders”).

....

WHEREAS, the Corporation intends to file an election to be taxed as an S corporation under the Internal Revenue Code of 1986, as amended with the consent of the Original Shareholders; and

WHEREAS, the Original Shareholders, acting for themselves and for all persons who subsequently may become shareholders of the Corporation (the “Shareholders”), and the Corporation wish to keep the election in force until it is revoked pursuant to this Agreement.

NOW, THEREFORE, the Original Shareholders and the Corporation agree as follows:

Section 1. Voluntary Transfer of Stock. No Shareholder shall transfer stock of the Corporation by sale, gift, assignment, pledge, or other voluntary disposition or encumbrance unless he shall have provided the Corporation, at least thirty (30) days prior to the proposed transfer, with a written statement (the “Notice”) regarding the identity of the proposed transferee sufficient to satisfy the Corporation that (a) the proposed transferee is an eligible S corporation shareholder and (b) the proposed transfer will not cause the record number of Shareholders of the Corporation to exceed thirty-two (32). Such proposed transfer may be effected by the Shareholder only if the Corporation approves the transfer in accordance with Section 3 below. Any transfer of stock of the Corporation that is not described in this Section 1 as a voluntary transfer shall be considered an involuntary transfer subject to the provisions of Section 2 below.

Section 2. Involuntary Transfer of Stock. In the event any Shareholder:

(a) dies;

....

and, as a result of such event, the stock of the Corporation owned by that Shareholder is subject to being transferred, ... the Shareholder shall be deemed, when the identity of the proposed transferee is established, to have given Notice, as defined under Section 1 hereof, except that the Corporation shall not be deemed to have received such Notice until the Corporation has actual knowledge of the event and the identity of the proposed transferee.

Section 3. Approval by the Corporation. Within twenty (20) days of the receipt of a Notice required by Section 1 hereof, the Corporation shall advise the Shareholder who provided the Notice whether the Corporation approves the transfer. The Corporation may, in its sole discretion, approve or disapprove any proposed transfer, except that the Corporation shall withhold its approval of any proposed transfer if (a) it would cause or reasonably could cause the Corporation's S status to terminate or (b) it would cause the record number of Shareholders of the Corporation to exceed thirty-two (32). [ ²]

Section 4. Effect of Noncompliance. In the event of any purported or attempted transfer of stock that does not comply with the provisions of this agreement, the purported transfer shall be void and the purported transferee shall not be deemed to be a Shareholder of the Corporation and shall not be entitled to receive a new stock certificate or any dividends or other distributions on or with respect to the stock.

Section 5. Redemption of Shares. If a Shareholder attempts to transfer stock of the Corporation in a manner that does not comply with the provisions of this Agreement, the shares purported to be transferred shall, at the Corporation's option, be deemed to be redeemed immediately before the occurrence of the attempted transfer. If the Corporation exercises its option to redeem shares, the amount to be paid therefor shall be their book value ... as of the end of the fiscal year immediately preceding the redemption ..., which amount shall be payable in cash.[ ³]

Daws signed both corporations' shareholders' agreements. McKnight asserted through an affidavit that the goals of the transfer restrictions were to protect the corporations' anticipated Subchapter S status, minimize franchise taxes, promote ownership by shareholders who contributed to the success of the banks owned by the corporations “in some way other than indirect ownership,” and comply with various “federal and state banking requirements, which may from time to time affect bank ownership.” ⁴

All of the corporations' shareholders had to consent to Subchapter S status for the conversions to occur.⁵ Craig explained that new legislation had been passed that permitted financial institutions to become S corporations effective in 1997. He also said that a corporation could not qualify for Subchapter S status if it had more than seventy-five shareholders.⁶ Craig conceded that federal law does not require S corporations to have shareholders' agreements. He explained, however, that such agreements are helpful to protect Subchapter S status because the agreements may prevent shareholders from exceeding seventy-five or from transferring stock to an impermissible shareholder, such as another corporation. Craig said,

It's extremely easy to have an inadvertent termination of an S election. And one of the reasons that you have a shareholders['] agreement is to help put you in the best position to argue with the IRS that there wasn't an impermissible transfer, that there are contractual restrictions that prevent that....

... [I]t's never a position that one wants to be in to ask for forgiveness from the IRS.

Daws died on June 25, 2000 (years after signing the shareholders' agreements), at which time she owned over 25% of the shares of Throckmorton's stock, making her the corporation's largest shareholder. She was a minority shareholder in Olney. She also had a checking account with the First National Bank of Throckmorton that contained...