Lycan v. Walters
| Decision Date | 11 October 1995 |
| Docket Number | Civ. A. No. IP 92-925-C. |
| Citation | 904 F. Supp. 884 |
| Parties | R. Jeannette LYCAN, Gray Farms, Inc., an Illinois Corporation, and David Pauley as Trustee Under The Will of Millard Pauley, Deceased, Plaintiffs, v. Gary W. WALTERS, Frances N. Brownsing, Prime Corporation, Inc., an Indiana Corporation, J. Albert Garcia, Rally Ventures, Ltd., a New York Corporation, The Rally Group, Ltd., a California Corporation, John Collins, Mark E. Maddox, and Coons & Saint, Douglas R. Brown, and Stewart & Irwin, Defendants. |
| Court | U.S. District Court — Southern District of Indiana |
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John W. Lawson, Indianapolis, IN, for Plaintiff.
Thomas J. Werner, Indianapolis, IN, for Defendant Prime Corporation.
Eric Redman, Cohen & Malad, Indianapolis, IN, for Defendants Garcia, Rally Ventures and Rally Group.
Gary P. Price, Brett J. Miller, Lewis & Kappes, Indianapolis, IN, for Defendants Maddox, Coons & Saint.
Richard Ewing, Stewart & Irwin, Indianapolis, IN, for Defendants Brown and Stewart & Irwin.
This case comes before the Court on four separate motions for summary judgment filed by three groups of Defendants and by the Plaintiffs in a complex securities action. The first group of moving defendants includes J. Albert Garcia, Rally Group, Ltd.; and Rally Ventures Ltd. (collectively "Rally Defendants"). The second group includes attorney Douglas R. Brown and his firm, Stewart & Irwin (collectively "Brown/S & I"). The third includes attorney Mark E. Maddox and his law firm, Coons & Saint (collectively "Maddox/C & S"). For the reasons set forth below, this Court GRANTS in part and DENIES in part the motion of the Rally Defendants; GRANTS the motion of Defendants Brown/S & I; GRANTS the motion of Defendants Maddox/C & S; and DENIES the motion of Plaintiffs Jeannette Lycan, David Pauley, and Gray Farms, Inc.
At the heart of this case lies a complex investment transaction. The events unfolded after Prime Battery Manufacturing Co. ("Prime Battery") declared bankruptcy. Gary Walters ("Walters"), Norman Reinbold ("Reinbold"), and Warren Spangle ("Spangle") incorporated Prime Corporation for the purpose of acquiring the assets of Prime Battery out of bankruptcy. Walters, Reinbold, and Spangle acted as incorporators for the corporation. Spangle served as Chairman of the Board for Prime Corporation and owned a seven percent interest in the company. Reinbold owned a five percent interest. Frances Brownsing ("Brownsing") owned fifty-one percent of the company and was the controlling shareholder. Prime Corporation also contracted with John Collins ("Collins") and New Image Public Relations ("New Image") "to act in the capacity as the Financial PR firm for Prime Corporation." Pls.Statement of Gen.Iss.Opp. the Mot. of the Rally Defendants for Summ.J., Ex. 3, p. 3 (hereinafter "Pls.Statement (Rally Defendants)").
The parties intended a two-step process. First, Prime Corporation would merge with Rally Ventures Ltd., a California corporation controlled by J. Albert Garcia. Second, the stock of Prime Corporation would be used to acquire Prime Battery's assets. Two attorneys were retained by Prime Corporation to assist with these transactions. Douglas R. Brown ("Brown") was hired to get the Prime Battery assets out of bankruptcy; Brown also served as corporate counsel for Prime Corporation. Mark E. Maddox ("Maddox") was hired to do the necessary securities work.
The Plaintiffs in this matter are R. Jeannette Lycan ("Jeannette Lycan"); Gray Farms, Inc. ("Gray Farms"); and David Pauley, the trustee under the will of Millard Pauley (collectively "the Plaintiffs" or "Plaintiffs"). Jeannette Lycan is the wife of Wayne Lycan and the mother of Steven Wayne Lycan ("Steve Lycan").1 At the time of these transactions, Wayne and Jeannette Lycan were retired farmers in southern Illinois. Millard Pauley, who is now deceased, was also a retired farmer in southern Illinois. Gray Farms is a family owned farm corporation in southern Illinois; Ronald Gray is the President of Gray Farms.
Walters, along with several other individuals, solicited the Plaintiffs to invest in the acquisition of Prime Battery. In April 1991, Wayne Lycan went to the Prime Battery plant in Anderson, Indiana to see the assets and new equipment. Steven Lycan Aff., ¶ 14, p. 3 (hereinafter "Lycan Aff."). Steve Lycan recalled his mother telling him in late May of 1991 that she had invested $2,000.00 in the Prime Battery deal. Lycan Aff., ¶ 10, p. 2. Lycan also stated that, on July 12, 1991, his mother loaned $100,000.00 to Prime Corporation. Lycan Aff., ¶ 48, p. 7. During the months of July, August, and September, Plaintiffs assert that an additional $125,000.00 passed from Jeannette Lycan to Prime Corporation, yielding a total investment of $227,000.00 by Jeannette Lycan. First Amended Complaint, ¶ 37, pp. 12-13.
In July 1991, Walters and his accountant, Azeem Meo ("Meo"), visited the residence of Millard Pauley and made a presentation to a few farmers about Prime Battery. Ronald Gray Aff., ¶ 5, p. 2 ("Gray Aff."). Among those present at this meeting were Steve Lycan and Ronald Gray. Walters told the group he was looking for a short term loan to bring Prime Battery into production, and he promised a return of fifty percent for use of the money for ninety days. Gray Aff., ¶ 5, p. 2. At Walters' invitation, Steve Lycan and Ronald Gray visited Indiana to see the Prime Battery plant and to meet the attorneys handling the bankruptcy (Brown) and the securities matters (Maddox). Gray Aff., ¶ 7, p. 3. After this visit, Gray Farms and Millard Pauley decided to invest in the transaction. Gray Farms invested $60,000.00 — including $20,000.00 from Steve Lycan. Lycan Aff., ¶ 46, p. 7. Millard Pauley invested an additional $50,000.00. Lycan Aff., ¶ 47, p. 7. Accordingly, the total investment by Jeannette Lycan, Millard Pauley, and Gray Farms was $337,000.00.
The Plaintiffs' investments were to be treated as a stock sale rather than as a loan. Lycan Aff., ¶ 35, p. 6. These investments were to be secured by the assets of Prime Battery, as described in the collateral escrow agreement and the addendum to that agreement. Lycan Aff., Exs. 50, 51. This agreement and addendum were signed by Maddox as escrow agent; by Brownsing, both individually and on behalf of Prime Corporation; by Ron Gray on behalf of Gray Farms; and by Jeannette Lycan. Walters also signed the addendum in an individual capacity. Millard Pauley's signature does not appear on either the agreement or the addendum. Lycan Aff., Ex. 51. The transaction was structured as a loan, and the Plaintiffs were to receive their money back — with fifty percent interest — in 90 days, which was around October 18, 1991.
Eventually, the investment transaction collapsed. The attempt to recover Prime Battery's assets out of bankruptcy failed. The intended merger of Rally Ventures Ltd. with Prime Corporation was never completed. When the transaction unraveled, Plaintiffs filed the present action against these eleven Defendants. Three separate groups of Defendants have now filed motions for summary judgment, and the Plaintiffs have responded with their own motions for summary judgment against each group of moving Defendants. For the purpose of clarity, the specific facts relating to each group of Defendants moving for summary judgment will now be set forth separately.
At all times relevant to this litigation, J. Albert Garcia ("Garcia") owned all the stock of the Rally Group, Ltd. ("Rally Group"), a California Corporation. In turn, Rally Group owned a controlling interest in Rally Ventures, Ltd. ("Rally Ventures"), a New York corporation listed on the NASDAQ stock exchange. Accordingly, Garcia controlled both companies. Def.Br. in Supp. of Mot. for Summ.J., 1 (hereinafter "Garcia Br.").
In 1991, Garcia negotiated a stock option sale with Prime Corporation. Garcia.Br., 1. In May 1991, Garcia agreed — in principle — to sell 1.5 million shares of Rally Ventures to Prime Corporation for $750,000.00. At that time, the parties intended that Prime Corporation would merge into Rally Ventures and operate as a subsidiary. Lycan Aff., Ex. 55. Rally Ventures, Rally Group, Prime Corporation, Garcia, and Brownsing executed a Letter of Intent ("Letter" or "Letter of Intent") to this effect on May 21, 1991. Lycan Aff., Ex. 55.
In briefs and motions, Plaintiffs have focussed heavily upon the language of this Letter of Intent. The Letter states the parties' intention "to acquire a controlling interest in the issues and outstanding shares of Prime Corporation...." The parties note that "the transactions contemplated herein are subject to the final approval of the Bankruptcy Court in the bankruptcy proceeding for Prime Battery Manufacturing, Inc...." The Letter also provides that "Rally and Prime shall execute a final agreement upon the completion of their due diligence." In Paragraph 8A, the Letter states: "Upon the execution of this Letter, payment of Fifty Thousand Dollars ($50,000), and receipt of the promissory notes and guarantees described below, Rally shall deliver to Frances Brownsing One Hundred Thousand (100,000) shares of Rally common stock that is restricted." Lycan Aff., Ex. 55.
In a press release dated June 4, 1991, Rally Ventures "announced the agreement in principle and signing of a letter of intent to acquire substantially all of the assets and stock of Prime Corporation of Indianapolis, Indiana." Lycan Aff., Ex. 60.
Ultimately, the transactions contemplated in the Letter of Intent collapsed. On September 23, 1991, Garcia sent a letter to Prime Corporation, Wayne Lycan, and several others stating: "Your inability to comply with the original subject agreement ... leaves us no recourse but to advise you...
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