Nathan v. Hudson, 16311

• Decision Date: 21 February 1964
• Docket Number: No. 16311,16311
• Parties: Gerald NATHAN et al., Appellants, v. William H. HUDSON, Appellee.
• Court: Texas Court of Appeals

Page 856

376 S.W.2d 856

Gerald NATHAN et al., Appellants, v. William H. HUDSON, Appellee.

No. 16311.

Court of Civil Appeals of Texas, Dallas.

Feb. 21, 1964.

Rehearing Denied March 20, 1964.

Kilgore & Kilgore, William C. Garrett and Charles F. Hawkins, Dallas, for appellants.

Johnson, Bromberg, Leeds & Riggs and Otis B. Gary, Dallas, for appellee.

BATEMAN, Justice.

The appellants Gerald Nathan et al., beneficiaries under the last will of Max Cohen, sued the appellee William H. Hudson to recover substantial profits realized from the resale of certain corporate stock which he had purchased from Cohen's estate. Appellants alleged that the executors and trustees under Cohen's will breached their trust in selling the stock to appellee in that one of them, John A. McGuire, in the same transaction contracted to sell to appellee a large amount of his stock in the same corporation on a more favorable basis than that obtained for the estate. It was also alleged that appellee knew of this breach of trust and participated in it. At the conclusion of a non-jury trial judgment was rendered that appellants taken nothing. We affirm.

By three points of error on appeal the appellants assert that the court erred in rendering judgment for appellee (1) upon the legal conclusion that appellee was a bona fide purchaser of the stock, (2) upon the legal conclusion that only the executors and trustees under Cohen's will could be held liable for the breach of trust, although appellee knowigly participated in it and profited thereby, and (3) because the breach of trust, appellee's participation therein and profits therefrom are all shown by stipulations, written agreements and other undisputed facts. These three points are so closely related that they will be considered together, as they were in the briefs of the parties.

Certain facts appear to be undisputed: Max J. Cohen died April 10, 1957 leaving a will in which John A. McGuire, Joseph P. Donohue and Felix Atwood were named independent executors and trustees. A principal asset of his estate was a large block of common stock in Three States Natural Gas Company. John A. McGuire became president of that company in 1951 and served as such until May 13, 1960, at which time his salary was $50,000 per year. He also served as a director of the company from 1951 until October 12, 1960. Cohen had been one of the original promoters of the company and had served it as a vice-president, general counsel and director.

Cohen had signed a promissory note in the principal sum of $1,236,340.45 payable to Byrd-Frost, Inc., the last installment of which, in the sum of $1,156,140.45 with accrued interest, was due on June 30, 1960. 1,136,590 shares of the common stock of Three States Natural Gas Company were pledged to secure the note, and the note provided that the maker would not be liable in any amount in excess of the value of the security thus pledged. Of the shares so pledged, half were owned by Cohen and half by McGuire. Although the note was signed only by Cohen, McGuire acknowledged in his testimony that he owed half of the debt.

There were 6,500,000 shares of Three States common stock outstanding, of which the Cohen estate owned 624,415 shares and McGuire owned (with other members of his family) 683,544 shares. Both the estate and McGuire were in financial difficulty, principally because of their need to pay or refinance the balance which would soon be due on the note held by Byrd-Frost, Inc. In addition, the Cohen estate owed estate and inheritance taxes in the sum of $290,871, long past due, and it was doubtful if any further extension of time for paying same could be obtained.

Appellee was also a shareholder in the Three States company, owning approximately 150,000 shares, and had served as vice-president from April 24, 1957 until January 16, 1959, at which time he resigned because of disagreement between him and McGuire on various management problems. Through an intermediary the executors sought to interest appellee in purchasing the Three States stock owned by the Cohen estate. Discussions on this subject began in December 1959 and continued until March 19, 1960 when a meeting was held between McGuire, Donohue, appellee and the attorney for Three States. All of those at the meeting were attorneys except appellee. At that time the over-the-counter market price for one hundred share lots of the company's stock ranged from $2.875 to $3 bid per share. Hudson, the appellee, offered to pay $2.50 per share for the Cohen stock, but only on condition that McGuire would resign as president and would give Hudson a voting proxy on McGuire's 683,544 shares. McGuire did not desire to do either, but Hudson insisted because otherwise he could not be sure of control of the company and of implementing his plans for expanding the company's drilling program and increasing the value of its holdings. McGuire demurred because a sale of his stock would result in a large capital gain tax, in addition to which his poor health caused him to fear that there might also soon be large estate taxes owing on his estate; also because he had a two million dollar investment in the company which he did not desire to risk under Hudson's program of management, in which he had less than complete confidence; also because the giving of a voting proxy on his stock would probably lower its collateral value for refinancing purposes. Moreover, to comply with Hudson's demands would require him to give up the $50,000 annual salary he was receiving as president.

After voicing all of these conflicting interests and ideas the parties entered into certain written agreements dated March 23, 1960, correctly summarized in appellants' brief as follows:

'Stock Purchase Agreement dated March 23, 1960, between Max J. Cohen Estate and Hudson:

'Hudson agreed to buy the Cohen Estate's 624,415 shares of Three States stock at $3.00 per share, one-half payable on May 16, 1960, and the other one-half payable on April 16, 1961, with 6% interest. Following May 16, 1960, Hudson would be entitled to vote on all questions all the Cohen shares so purchased including the one-half sold on credit. One-half of the shares was to be delivered on May 16, 1960, and the other half retained as security for the remaining payment.

'Option Agreement dated March 23, 1960, between McGuire, personally, and Hudson:

'1. McGuire obtained the option to require Hudson to purchase all or any part of the 683,544 shares of Three States owned by McGuire and his family at $3.00 per share from time to time and at any time during the period continuing to May 16, 1962, except that McGuire could not require Hudson to purchase such stock at a rate faster than one-fourth of the total amount every thirty days.

'2. McGuire obtained the right to have Hudson provide him a loan of over $588,000 at not more than 6% interest, such loan to remain in effect until May 16, 1962, for which McGuire would furnish as security only 539,562 of McGuire and family's 683,544 Three States shares.

'3. McGuire obtained the right to have Hudson pay interest on the McGuire borrowings of over $588,000 referred to above in an amount proportionate to the number of shares that might be purchased by Hudson under the agreement, either as the result of McGuire's requiring such purchase at $3.00 per share or as a result of Hudson's requiring McGuire to sell at $6.00 per share.

'4. McGuire reserved the right to sell all or any part of his and his family's 683,544 shares of Three States stock upon any terms he desired, to any other party, and upon such sale to take such shares completely out of the agreement. This meant that McGuire could, if he so elected, sell the shares free of any right of Hudson to vote such shares and free of all of the other terms of the agreement. Shares so sold would not thereafter have any of the benefit of the said agreement. To some extent McGuire was to apply some part of the proceeds of sales to relieve his debt.

'5. Hudson received the right. until May 16, 1962, to vote the 683,544 shares of Three States stock owned by McGuire and his family to the extent that such shares were not thereafter sold by McGuire and his family to other parties, but such voting rights did not include the right to vote upon:

'(I) any merger or consolidation of the company;

'(II) any liquidation of the company;

'(III) any recapitalization of the company; or

'(IV) any proposed sale or all or substantially all of the assets of the company.

'6. Hudson received the right, until May 16, 1962, to require McGuire to sell all or any part of the 683,544 shares of Three States stock owned by McGuire and his family, or such part thereof as McGuire did not sell to others, at $6.00 per share.

'Side Letter Agreement dated March 23, 1960, between McGuire, personally, and the Hudson brothers:

'To further secure John McGuire with respect to the Option Agreement, the Hudson brothers agreed to keep unencumbered assets upon which $2,000,000 could be borrowed available in their personal accounts or trust accounts from May 16, 1960, to May 16, 1962.'

These contracts were consummated on May 13, 1960, on which date McGuire executed his promissory note to the First National Bank in Dallas in the sum of $588,122.23, which was endorsed by appellee and his brother. McGuire also pledged as collateral security to this note 539,562 shares of Three States stock. Appellee caused his brother also to pledge certain of his securities valued at $100,000. The proceeds of that note, together with an equal amount of cash from the Cohen estate, were used to retire the Byrd-Frost, Inc. note, and the stock pledged thereunder was released. McGuire and...