McMillan, Ltd. v. Warrior Drilling and Engineering Co., Inc.

• Decision Date: 31 October 1986
• Docket Number: No. 84-1109,84-1109
• Citation: 512 So. 2d 14
• Parties: 4 UCC Rep.Serv.2d 1546 McMILLAN, LTD., an Alabama Limited Partnership, et al. v. WARRIOR DRILLING AND ENGINEERING COMPANY, INC., and Howell Petroleum Corporation.
• Court: Alabama Supreme Court

Page 14

512 So.2d 14

4 UCC Rep.Serv.2d 1546

McMILLAN, LTD., an Alabama Limited Partnership, et al. v.WARRIOR DRILLING AND ENGINEERING COMPANY, INC., and Howell Petroleum Corporation.

No. 84-1109.

Supreme Court of Alabama.

Oct. 31, 1986.

On Rehearing May 15, 1987.

Rehearing Denied July 24, 1987.

Alton B. Parker, Jr. and J. Mark Hart of Spain, Gillon, Riley, Tate & Etheredge, Birmingham, for appellants.

James A. Harris, Jr., Kaye K. Houser, and Charles R. Driggars of Sirote, Permutt, Friend, Friedman, Held & Apolinsky, P.C., Birmingham, for appellees.

BEATTY, Justice.

This is an appeal by plaintiffs, McMillan, Ltd., and its managing general partners, individually (hereinafter referred to collectively as "McMillan"), from a summary judgment entered in favor of the defendants, Warrior Drilling and Engineering Company, Inc.(hereinafter "Warrior") and Howell Petroleum Corporation(hereinafter "Howell") in plaintiffs' suit seeking, among other things, specific performance of an option to purchase stock.We reverse and remand.

I.

Warrior is an Alabama corporation with its principal place of business in Tuscaloosa.At the time of its incorporation in 1971, Warrior had a total of seven stockholders with 100,000 shares of common capital stock authorized.William E. Tucker, Warrior's founder and principal incorporator, received 40,000 shares of Warrior stock in consideration for his work for the company during its first year of operation.The other six stockholders paid $1.00 per share for varying portions of the remaining 60,000 shares.

McMillan is an Alabama limited partnership with its principal place of business in Brewton, Alabama.At all times pertinent to this lawsuit, Robert C. McMillan and Albert C. Tate, Jr.(now deceased), were the managing general partners of McMillan.

In 1974, Warrior declared a ten-for-one stock split, which resulted in there being one million Warrior shares issued, with another million shares authorized to be sold by the corporation.Of these latter authorized shares, 37,000 shares were given to a consultant in exchange for work performed for Warrior.None of the remaining authorized shares were ever sold.

In late 1979, Warrior began to experience financial difficulties.At the suggestion of the First National Bank of Birmingham (Warrior's principal creditor, which held Warrior notes totaling $32 million), Warrior entered into an agreement with the Holly Corporation, a Texas corporation, with respect to Holly Corporation's acquisition of Warrior's assets.In connection with this transaction, the members of Warrior's board of directors (including Tucker) entered into a stock option agreement with Holly Corporation on February 15, 1980.

In late March or early April of 1980, Tucker learned that Holly Corporation was attempting to acquire 125,000 shares of Warrior stock from a group of investors in Montgomery, Alabama, who held the stock in the name of Investment Capital Corporation.The price offered by Holly Corporation was $2.25 per share.Tucker attempted to arrange financing to purchase these shares himself.Unable to do so in time, Tucker had checks totaling $300,000 issued on the Warrior checking account to purchase in his own name the 125,000 shares from Investment Capital Corporation.When this transaction was discovered, Tucker was fired from his position as president and removed as chairman of Warrior's board of directors.¹

In order to repay Warrior for the $300,000 he had "borrowed" from the company to purchase this stock, Tucker borrowed $100,000 from each of three different sources, one of which was McMillan.McMillan agreed to make the loan on the basis of Tucker's pledging 44,445 shares of Warrior stock as collateral for the loan and in consideration for an option to purchase up to 10 percent of the outstanding voting common stock of Warrior at a price of $2.25 per share, the option to run for one year.The parties entered into a written agreement to this effect on April 11, 1980, entitled "SECURITY AGREEMENT & OPTION TO PURCHASE."The agreement provided in pertinent part as follows:

"This agreement made and entered into April 11, 1980 between William E. Tucker, 1413 7th Court N.E., Tuscaloosa, Alabama 35401, hereafter called the Pledgor, and McMillan Ltd. an Alabama Limited Partnership, Leigh Pl., Brewton, Alabama 36427, hereafter called Pledgee.

"WHEREAS, at the time of the execution of this agreement the Pledgee has loaned the Pledgor the sum of 100M evidenced by promissory note for such amount, and

"WHEREAS, to induce the pledgee to make such loan, the Pledgor has agreed to pledge certain common stock in Warrior Drilling & Engineering Co., Inc., an Alabama Corporation hereafter called Warrior, with Pledgee, as security for repayment of such loan, and further to offer Pledgee the option to purchase stock owned by Pledgor in Warrior:

"It is therefore agreed:

"1.In consideration of sum of 100M loan to Pledgor by Pledgee, receipt of which is hereby acknowledged, the Pledgor grants a security interest to Pledgee in 44,445 shares of voting common stock of Warrior, an Alabama Corporation.It is recognized between parties that Pledgor is owner of said stock by virtue of a recent acquisition but Pledgor is not presently in physical possession of stock certificates.

"Pledgor agrees that upon obtaining physical possession of Certificate properly registered in his name, that he will fully endorse in blank and immediately deliver to Pledgee certificates representing a minimum of 44,445 shares of common stock of Warrior.

"Upon delivery of the stock, Pledgor hereby appoints the Pledgee as Attorney to arrange for the transfer of pledged shares on the books of Warrior to the name of the Pledgee.

"2.Option to purchase stock as further consideration for making this loan.Pledgor does grant unto Pledgee the option to purchase up to ten percent of the outstanding voting common stock of Warrior at a net price to Pledgee of $2.25 per share, with said option to remain in existence for a period of one year from the date of the execution of this instrument.Pledgor represents that either he individually or in conjunction with third parties owns and/or controls sufficient shares of Warrior necessary to fulfill the terms of this paragraph."

The parties also executed a written assignment of the pledged stock in favor of McMillan, and Stock CertificateNo. 225 in the amount of 44,445 shares was delivered to McMillan by Tucker as security for the loan.

On April 16, 1980, Warrior filed a bankruptcy petition, seeking the protection of the court under Chapter 11 of the Bankruptcy Act.Tucker filed a personal Chapter 11 proceeding that same day.The First National Bank of Birmingham objected to the bankruptcy proceedings and attempted to force Warrior into an asset liquidation.Warrior resisted by attempting to put together a "Plan of Reorganization" which would be acceptable to the bankruptcy court.The deadline for filing this plan was September 5, 1980.

In July of 1980, Howell became interested in Warrior as a possible acquisition.Howell is a Delaware corporation with its principal place of business located in Houston, Texas.Howell conducted an acquisition study, including several visits to Warrior's offices, with Howell's acquisition team spending two weeks in Alabama studying the proposal.On August 25, 1980, Howell delivered to Tucker a written offer to purchase all of the outstanding stock of Warrior.By letter dated August 26, 1980, Tucker informed Howell of the outstanding Holly Corporation option, which expired on August 31, 1980.No mention was made in this letter of the McMillan option; Tucker, nevertheless, insists that he also informed Howell of the McMillan option, although not in writing.Indeed, Tucker testified that Paul Howell, chairman of the board of Howell; Darby Sere, acquisitions vice president; and Sidney F. Jones, Jr., president, all read everything in the file on McMillan, including the security agreement and the option.Tucker testified that Sere asked specific questions regarding the likelihood of McMillan's exercise of its option and the possibility of McMillan's subsequent refusal to sell to Howell.Howell denies that it was so informed as early as September 5, 1980.

On September 5, 1980, Tucker and other shareholders (whose combined stock ownership totalled approximately 80 percent of Warrior' stock) accepted Howell's offer and entered into an agreement with Howell.That agreement provided that Howell would purchase all of Warrior's stock at $3.57 per share, of which one-half of the purchase price would be paid to the tendering shareholders at a closing scheduled for December 2, 1980, and the other half placed in escrow to be paid at a later date subject to certain setoffs.That agreement further provided:

"On the closing date [Howell] will acquire from each Shareholder signing this agreement and each such Shareholder represents to [Howell] that [Howell] will acquire all of the [Warrior] stock owned by such Shareholder free and clear of all liens, claims, options or other encumbrances."(Emphasis added.)

Tucker sent a copy of this agreement to McMillan prior to October 1, 1980.

In early October, Tucker petitioned to dismiss his personal bankruptcy proceeding.Richard S. Riley, an attorney representing McMillan, appeared at the hearing on Tucker's motion to dismiss, and announced that McMillan had an option to purchase Tucker's shares in Warrior and expected it, as well as its note, to be satisfied.Howell objected to the dismissal of Tucker's personal bankruptcy, and was represented by counsel at the hearing on Tucker's motion.Tucker testified that counsel for Howell was present at the time of Riley's remarks.

By letter dated October 20, 1980, and addressed to Sidney F. Jones, Jr., president of Howell, Riley informed Howell of McMillan's option and took the position that any shares Howell purchased from Tucker would be subject to the...