Long v. Lampton

• Decision Date: 28 May 1996
• Docket Number: No. 95-774,95-774
• Citation: Long v. Lampton, 324 Ark. 511, 922 S.W.2d 692 (Ark. 1996)
• Parties: Charles L. LONG, et al., Appellants, v. Leslie B. LAMPTON and Ergon, Inc., Appellees.
• Court: Arkansas Supreme Court

Page 692

922 S.W.2d 692

324 Ark. 511

Charles L. LONG, et al., Appellants, v. Leslie B. LAMPTON and Ergon, Inc., Appellees.

No. 95-774.

Supreme Court of Arkansas.

May 28, 1996.

Dennis L. Shackleford, Jerry W. Watkins, El Dorado, for appellants.

Gordon S. Rather, Jr., Sammye L. Taylor, David Powell, Little Rock, for appellees.

ROAF, Justice.

This appeal arises from a minority shareholders' action for breach of fiduciary duty. Appellants Charles Long and other members of the Long family, minority shareholders of Lion Oil Company ("Lion"), filed an action against appellees Ergon, Inc. ("Ergon"), the largest shareholder of Lion, and Leslie B. Lampton, president of both Ergon and Lion, alleging breach of fiduciary duty in the implementation of a corporate recapitalization plan. The Longs appeal a jury verdict in favor of Lampton and Ergon. They assert that the trial court 1) erred in denying a motion for new trial on the ground that the verdict was clearly against the preponderance of the evidence; 2) erroneously instructed the jury that they had the burden of proving Lampton and Ergon owed them a duty as a fiduciary; and 3) erroneously instructed the jury that Lampton and Ergon could rely on the business-judgment rule. In their cross-appeal, Lampton and Ergon raise five points to be addressed only if we reverse on direct appeal. We find no error and affirm.

Charles L. Long and Leslie B. Lampton, as president of Ergon, were among five investors who came together in 1985 to purchase a refinery, pipeline and other related assets located in El Dorado, Arkansas. Long is one of four brothers involved in various business ventures in Union and Miller Counties, including Long Brothers Oil Company. Ergon is a family owned corporation headed by Lampton and based in Jackson, Mississippi. The new corporation became known as Lion Oil Company. It was determined that $24 million was needed to acquire the refinery and sustain its operation. The longtime attorney of Charles Long also served as counsel for Lion and drafted the Pre-Incorporation Agreement. Under this agreement, each investor was to obtain a letter of credit from a financial institution, in the amount of $2 for each $1 par value subscribed in stock. Of the 8 million shares of stock originally issued, Charles Long invested $1.5 million in cash with a letter of credit from First Commercial Bank ("First Commercial") in the amount of $3 million; he later transferred some of his stock to other members of his family. Ergon invested $4.5 million and provided a $9 million letter of credit. Several other investors were later brought into the corporation; Ergon ultimately owned 43.3% of the stock and the Longs owned 18.6%.

Ergon contracted to manage Lion in exchange for a fee of 20% of the net profits. This management was overseen by Lion's seven-member board of directors, which met monthly and received information concerning all aspects of the refining operation, including financing needs. Long served as chairman of the board from Lion's inception until April 1989. His attorney also served on the board, although he held no stock in the company.

Because Lion's business of refining oil required periodic purchases of crude oil in tanker-size lots, Lion needed to have access to substantial amounts of credit from a commercial lender. Lion originally operated under a $60 million line of credit from General Electric Capital Corporation ("GECC") secured by Lion's inventory, its receivables, and a pledge of the shareholders letter of credits. During the initial four years of operation, the directors periodically discussed eliminating the shareholders letters of credit but decided not to do so because of the need for the additional credit they provided to Lion.

The events which gave rise to this lawsuit and appeal took place primarily between February and September, 1989. As the May 1, 1989, expiration date of the financing arrangement with GECC approached, the board directed Lion's chief financial officer to locate a more advantageous line of credit. The board subsequently selected First National Bank of Boston ("Bank of Boston") to replace GECC because its credit line was less expensive and more generous in the valuation it placed on Lion's inventory and receivables. Lion's directors, including Long, voted unanimously on February 28, 1989, to make the change form GECC to Bank of Boston effective May 1, 1989.

Although the Bank of Boston did not require Lion to provide shareholders' letters of credit, it did agree to provide additional credit per dollar of each shareholder letter of credit offered by Lion, therefore making available to Lion an additional $16 million in credit. The Bank of Boston would not accept transfer of the GECC letters of credit, but required the issuance of new letters in its favor or amendments which named it as beneficiary.

The Longs' initial $3 million letter of credit with First Commercial had been issued on July 1, 1985. Although the preincorporation agreement did not set a time limit for the shareholders' letters of credit, the banking institutions which agreed to issue them were told that they would be needed for only three to five years, or until Lion had established sufficient credit on its own. Each shareholders' letter of credit provided that it could be called in the event the lending institution failed on or before April 1 of any year to extend or renew it for an additional year. Therefore, if First Commercial failed to renew the Longs' letter of credit by April 1, this would be considered a default which would allow GECC to demand payment on the letter of credit. If the Longs' letter of credit was called by GECC, First Commercial would in turn demand $3 million from the Longs who could then look to Lion for repayment.

The Longs' letter of credit was renewed for 1988-89 and was "irrevocable and transferable." However, because of certain financial reversals suffered by the Longs, First Commercial advised them in February 1989, that it would not renew their letter of credit for 1989-90. At the March 1989 board meeting, Charles Long told the other board members, including Lampton, of the bank's intention not to renew his letter of credit.

GECC attempted to call the Longs' letter of credit and demanded payment from First Commercial on April 13, 1989. Upon learning of GECC's call on the letter of credit, Long and his attorney sent correspondence to First Commercial and GECC threatening litigation unless the demand for payment was withdrawn. Lampton learned in a telephone conversation with an officer of First Commercial on April 13, 1989, that First Commercial would agree to extend the letter of credit for one more year, however, he was advised that the letter would be issued as non-transferable. GECC withdrew its demand for payment after the letter of credit was renewed.

At the annual shareholders meeting on April 27, 1989, Lampton was elected chairman of the board to replace Charles Long, who had been chairman since 1985. Two of Lampton's sons and the son of another substantial shareholder were elected to replace three other board members.

Lampton testified that after learning of the Longs' plight at the March Board of Directors meeting, several shareholders complained that it would be unfair for the Longs to maintain the same amount of stock while withdrawing two-thirds of the capital they had agreed to provide because they would or could not renew their letter of credit. According to Lampton, he was requested by other shareholders to find a way to address this inequity. At the April 27, 1989 board meeting, Lampton provided a draft recapitalization plan prepared by Lion's attorneys in Mississippi who had been working on the company's transaction with the Bank of Boston.

The recapitalization plan was approved at a September 1989 shareholders' meeting and granted each shareholder the right to acquire at $.10 per share, one additional share of stock for each dollar in letters of credit placed with the Bank of Boston. According to Lampton, this plan was designed to encourage shareholders to put up new letters of credit by acquiring more stock which could be pledged as collateral. The plan further provided for the number of shares to be increased from 10 million to 30 million followed by a reverse stock split to reduce the number of shares. Because they were unable to put up letters of credit and thereby purchase additional shares of stock, the Longs' 1.5 million shares were reduced to 675,000 and their $1.5 million investment reduced to $675,000. It is this loss in their investment which gave rise to the Longs' action against Lampton and Ergon.

1. Motion for new trial

The Longs first argue that the trial court erred in denying their motion for new trial because the verdict was clearly against the preponderance of the evidence regarding Lampton's breach of his fiduciary duty. Lampton, and consequently Ergon, breached their fiduciary duty, according to the Longs, when Lampton failed to either timely advise the Longs that First Commercial would not issue a transferable letter of credit which would have allowed them the opportunity to request a call of the letter of credit, or to act within his authority to require First Commercial to issue a transferable letter of credit.

On appeal, this court's standard for reviewing the denial of a motion for new trial is whether there is any substantial evidence to support the jury verdict. Ray v. Green, 310 Ark. 571, 839 S.W.2d 515 (1992). In determining the existence of substantial evidence, we must view the evidence in the light most favorable to the appellee. Egg City of Arkansas, Inc. v. Rushing, 304 Ark. 562, 803 S.W.2d 920 (1991). Evidence favorable to the appellee is given the benefit of all reasonable inferences permissible under the proof. Scott v. McClain, 296 Ark. 527, 758 S.W.2d 409 (1988). Substantial evidence compels a conclusion one way or the other and is more than mere...