Madison Bank and Trust v. First Nat. Bank of Huntsville, 81-267

• Decision Date: 28 June 1982
• Docket Number: No. 81-267,81-267
• Citation: 276 Ark. 405,635 S.W.2d 268
• Parties: , 1982-2 Trade Cases P 64,844 MADISON BANK AND TRUST, et al., Appellants, v. FIRST NATIONAL BANK OF HUNTSVILLE, Arkansas, et al., Appellees.
• Court: Arkansas Supreme Court

Page 268

635 S.W.2d 268

276 Ark. 405, 1982-2 Trade Cases P 64,844

MADISON BANK AND TRUST, et al., Appellants, v. FIRST NATIONAL BANK OF HUNTSVILLE, Arkansas, et al., Appellees.

No. 81-267.

Supreme Court of Arkansas.

June 28, 1982.

Rose Law Firm by Vincent Foster, Jr., Little Rock and Howard Cain, Jr., Huntsville, for appellants.

Friday, Eldredge & Clark by Robert K. Walsh, Little Rock, for appellees.

HOLT, Justice.

In October, 1980, following approximately one year of negotiations, the appellants purchased substantially all the outstanding shares of the Bank of Kingston, a state bank, now named Madison Bank and Trust. The buyer under the agreement was James E. McDougal, Agent. The sellers, the Hargis family trust and members of the Bunch family, were also the majority shareholders in the only other bank in Madison County, the appellee First National Bank of Huntsville. The purchase agreement provided for a cash purchase price which exceeded $500,000, plus a restrictive covenant. The contract provides in pertinent part:

WHEREAS, as an inducement to each of the SHAREHOLDERS to enter into this Agreement for the Sale and Purchase of Bank Stock, the BANK has agreed that during the ensuing ten (10) year period it will not move its main office or establish a branch bank or a teller's window in the Cities of Huntsville and Hindsville, the Town or Community of Marble, Madison County, Arkansas, and otherwise within a ten (10) highway mile radius of Huntsville, Madison County, Arkansas....

Thereafter, paragraph 7(b) provides:

As a part of the consideration to each of the SHAREHOLDERS and the essence of this Agreement for the Sale and Purchase of Bank Stock is the agreement of the BANK and the BUYER that the BANK shall not within a period of ten (10) years after this date establish its main office, or a branch office or a teller's window in the Cities of Huntsville and Hindsville, and the Town or Community of Marble, Madison County, Arkansas, and within a ten (10) highway mile radius of Huntsville, Arkansas....

About three months after the purchase or in the early part of 1981, the Board of Directors of the Bank of Kingston changed the name to Madison Bank and Trust and shortly thereafter initiated applications to the State Bank Department and the Federal Deposit Insurance Corporation (FDIC) for authority to amend its charter to permit moving its main office from Kingston to Huntsville and establish a full service branch at Kingston. After an investigation by the Bank Department staff and before the application was heard, the appellee bank and two of the sellers filed this action seeking specific performance of paragraph 7(b) of the agreement and an injunction against the appellants to prohibit them from proceeding with their application or acting contrary to the provisions of paragraph 7(b) in the purchase agreement. In response the appellants contended that the restrictive covenant was void and unenforceable under state law and violated antitrust laws. Following a hearing the trial court ordered specific performance of the agreement and granted the injunction.

The court found that the agreement was freely and voluntarily entered into by the parties on equal footing; that McDougal was expressly acting as agent for certain named appellants with the remaining appellants committed to be buyers at the time of closing; that the individual appellants knew of Paragraph 7(b) by the time of the closing; that the individual appellants as shareholders and directors of the Bank of Kingston ratified the purchase agreement; that the application to move the bank from Kingston to Huntsville would be in direct violation of Paragraph 7(b) of the agreement; that it was the intent of the parties that the bank of Kingston be bound thereby and the National Bank of Huntsville be a third party beneficiary to the contract; that paragraph 7(b) serves a legitimate purpose by protecting the residents of Kingston by limiting the ability of the bank to move its assets from that community and its people; that paragraph 7(b) was an essential part of the consideration for the sale or the transfer of stock and sale and transfer of the bank would not have occurred without paragraph 7(b); that paragraph 7(b) is not in violation of the Sherman Act since appellants are not prohibited from commencing a new bank or engaging in the business of banking in Huntsville or from otherwise competing for customers with any other financial institution; that paragraph 7(b) is a limited restraint, reasonable in scope, duration, and geographical extent; that the agreement is enforceable and binding on the individual appellants and the Bank of Kingston now Madison Bank and Trust. Hence this appeal.

Appellants first contend the trial court erred in finding paragraph 7(b) of the agreement has a legitimate, protectable purpose and is reasonable in scope and geographic extent. The general rule is that a contract in restraint of trade ancillary to a sale or a business transaction, which is reasonably limited as to time and place, is not against public policy and is not invalid. See Bloom v. Home Insurance Agency, 91 Ark. 367, 121 S.W. 293 (1909); Webster v. Williams, 62 Ark. 101, 34 S.W. 537 (1896); United States v. Empire Gas Corp., 537 F.2d 296 (8th Cir. 1976), cert. den. 429 U.S. 1122, 97 S.Ct. 1158, 51 L.Ed.2d 572 (1976); 17 C.J.S. Contracts § 238, p. 1107; 54 Am.Jur.2d, Monopolies, Etc., § 103.

There are two types of these contracts-one, the employer/employee and two, the sale or transaction involving an established business. The courts view a restraint of trade agreement ancillary to the transfer of a business with greater liberality, being "more prone to uphold restrictive clauses" than employer/employee covenants. McLeod v. Meyer, 237 Ark. 173, 372 S.W.2d 220 (1963); see also 42 Am.Jur.2d, Injunctions, § 115; and 54 Am.Jur.2d, Monopolies, etc, § 543. In Little Rock Towel and Linen Supply Co. v. Independent Linen Service Co. of Ark., 237 Ark. 877, 377 S.W.2d 34 (1964), we said: "Owing to the possibility that a person may be deprived of his livelihood the courts are less disposed to uphold restraints in contracts of employment than to uphold them in contracts of sale." Whether a restraint provision is reasonable or unreasonable is a question to be determined under the facts of each case. McLeod v. Meyer, supra. The burden is on the party challenging the validity of the covenant to show it is unreasonable and against public policy. See United States v. Empire Gas Corp., supra. The trial court's findings will not be reversed unless clearly erroneous. Ford Motor Credit v. Yarbrough, 266 Ark. 457, 587 S.W.2d 68 (1979); A.R.C.P. Rule 52(a), Ark.Stat.Ann. Vol. 3A (Repl.1979).

McDougal began negotiations to purchase the Bank of Kingston from the appellees in the summer of 1979. An offer to purchase was tendered to an officer and shareholder of the bank. The offer was not acted upon by appellees and in early 1980, because of a "no progress" report, McDougal told the officer and part owner that he had decided to forget the deal. In April, 1980, this bank official contacted McDougal and said that he and the other owners of the bank wanted to sell. Negotiations were resumed. One shareholder was a nonresident. By letter addressed to him dated April 21, 1980, McDougal offered $1,500 cash per share for his stock and to sign an agreement not to move the bank to Huntsville during the next ten years. Considerable discussion ensued with appellees. However, McDougal withdrew his offer by letter dated July 25, 1980. In August, appellees' attorney contacted McDougal and informed him he could close a deal on the bank. On August 21, 1980, McDougal signed an agreement to purchase the bank stock as "James B. McDougal, Agent." McDougal stated he signed as agent to make the sellers aware they could be expected to deliver the shares to persons other than himself. He knew about the restrictive covenant before he signed the agreement. There was conflicting testimony as to whether he or the sellers initiated the idea for the restriction. It appears that the other parties who purchased the stock knew of the existence of paragraph 7(b) before the October closing. It was stipulated that each stock certificate issued to appellants was endorsed, stating it was subject to the provisions of paragraph 7(b) of the agreement. In April, 1981, the Board of Directors of the appellant bank voted to amend its charter and make application to the State Bank Department to move its main office to Huntsville. In June, 1981, the Board of Directors rescinded the agreement or consent not to move its office to Huntsville on the basis that paragraph 7(b) was invalid and unenforceable.

The contract clearly provides and the testimony indicates, as the court found, that paragraph 7(b) was an essential part of the consideration for the sale, and the transaction would not have occurred but for appellants' covenant in paragraph 7(b). Appellees' expert witness testified that the purpose of such a restriction was to make transfers such as this possible. In United States v. Addyston Pipe and Steel Co., 85 F. 271 (6th Cir. 1898), aff'd 175 U.S. 211, 20 S.Ct. 96, 44 L.Ed. 136, the court said with respect to a buyer-seller covenant:

Again, when one in business sold property with which the buyer might set up a rival business, it was certainly reasonable that the seller should be able to restrain the buyer from doing him an injury which, but for the sale, the buyer would be unable to inflict. This was not reducing competition, but was only securing the seller against an increase of competition of his own creating. Such an exception was necessary to promote the free purchase and sale of property.

See also 14 Williston on Contracts, 3d, § 1637 (1972) and 54 Am.Jur.2d, § 528. Here, we cannot say that the chancellor's finding that paragraph 7(b) had a legitimate and protectable purpose is clearly erroneous, nor that...