National Founders Corp. v. Central Nat. Bank

• Citation: 521 S.W.2d 92
• Decision Date: 12 March 1975
• Docket Number: No. 992,992
• Parties: NATIONAL FOUNDERS CORPORATION, Appellant, v. CENTRAL NATIONAL BANK et al., Appellees. (14th Dist.)
• Court: Court of Appeals of Texas. Court of Civil Appeals of Texas

Page 92

521 S.W.2d 92

NATIONAL FOUNDERS CORPORATION, Appellant, v. CENTRAL NATIONAL BANK et al., Appellees.

No. 992.

Court of Civil Appeals of Texas,

Houston (14th Dist.).

March 12, 1975.

Rehearing Denied April 2, 1975.

Richard Ewing, David J. Nagle, Houston, for appellant.

Joseph L. Tita, Jerry Mabry, Tita, Lackshin & Nathan, Fletcher Etheridge, Hayden Burns, Butler, Binion, Rice, Cook & Knapp, Houston, for appellees.

COULSON, Justice.

This is a summary judgment case. The plaintiff, National Founders Corporation, appealed from an interlocutory summary judgment entered the 15th day of October, 1973, granting the motion for summary judgment of the defendants, Fred Armstrong and the American Capital Insurance Company, and a final summary judgment entered December 7, 1973, on the motion for summary judgment of the defendants, Central National Bank of Houston and John N. Hunt.

The appellant National Founders Corporation, as plaintiff, in its third amended original petition named as defendants the Central National Bank, John N. Hunt, the American Capital Insurance Company, and Fred Armstrong. National Founders Corporation sought to recover damages under alternative theories of conspiracy, breach of a fiduciary obligation, constructive trust, fraud, and tortious interference with business relationships.

Thomas Collins organized and developed Production National Life Insurance Company (hereafter P.N.C.). Thomas Collins died in 1962, leaving his 20% Of the stock in P.N.C. to his wife Louise Collins. After the death of Thomas Collins, Wade Campbell assumed management of P.N.C. Thereafter, Louise Collins divested herself of approximately one-half of her stock holdings in P.N.C. resulting in her owning approximately 10% Of the outstanding shares of P.N.C. Louise Collins was dissatisfied with the management of P.N.C. and requested Warren Fleming to assist her in an effort to alter its management. Negotiations between Louise Collins and the management of P.N.C. failed to establish conditions acceptable to her. A proxy fight resulted in which the Collins alliance failed in its effort to take over the management of P.N.C.

National Founders Corporation (hereafter N.F.C.) was formed by Fleming as an instrument in the proxy fight with P.N.C. Louise Collins transferred all of her shares of stock in P.N.C. to N.F.C. in exchange for forty-five percent of the outstanding stock of N.F.C. In order to pay off debts incurred during the proxy fight, N.F.C., through its president, Warren Fleming, borrowed $25,000 from the Central National Bank on November 5, 1964. The P.N.C. stock which Louise Collins had transferred to N .F.C. for forty-five percent of the outstanding stock of N.F.C. was pledged to the Central National Bank as security for the loan.

Central National Bank extended the original loan on seven different occasions and made additional advances to N.F.C. until the original $25,000 loan became $65,000. The last N.F.C. promissory note payable to Central National Bank was dated September 2, 1965, and was in the sum of $65,000 payable on or before thirty days after date. The said note was executed by Warren M. Fleming, individually and as president of N.F.C. The said note was secured by the pledge by N.F.C. of its 46,572 shares of stock in P.N.C. Corporation.

During the period from November 5, 1964, through September 2, 1965 Warren M. Fleming, as president of N.F.C., attempted to arrange a favorable merger between P.N.C. and one of several other small insurance companies. N.F.C. contends that American Capital Insurance Company and its president, Fred Armstrong, were interested in merging with P.N.C. but were looked upon with disfavor by Warren M. Fleming and Louise Collins.

John N. Hunt, president of Central National Bank, stated under oath that on September 2, 1965, he notified Warren M. Fleming that the $65,000 note of N.F.C. and Warren M. Fleming would be called on October 2, 1965, and that no further extensions would be granted. The note was not paid when it became due on October 2, 1965. Warren M. Fleming requested further delay in the payment of the note in order to either arrange a merger or move the loan to another bank. Central National Bank did not attempt to collect on the note until early December 1965, when it notified Warren M. Fleming and N.F.C. that the note was past due and that the collateral would be sold on December 15, 1965.

On the morning of December 15, 1965, a representative of the stockholders of N.F.C. tendered a check for the past due interest on the $65,000 note and requested that the sale of the collateral be delayed. This tender was rejected by John N. Hunt, as an officer of Central National Bank, and 46,572 shares of stock in P.N.C. were offered for sale pursuant to the collateral security agreement of N.F.C. In the course of the bidding, an offer of $2.90 per share was received and rejected by John N. Hunt. When the bidding was reopened, an offer of $3.10 per share was received from Robert Grantham and accepted by the Central National Bank. The total sales price of the stock was $144,373.20 of which $74,603.86 was paid by the Central National Bank to N.F.C. after deducting the principal of the note, accrued interest, and attorney's fees.

Robert Grantham obtained the $144,373.20 for the purchase of the 46,572 shares of stock in P.N.C. through a loan from the Republic National Bank of Dallas. The loan was guaranteed by Fred Armstrong. Two days after the sale, Fred Armstrong addressed a letter to Robert Grantham offering to purchase the shares at a price not to exceed $150,000. The sale was thereafter made by Robert Grantham to Fred Armstrong for the total sum of $147,856.80. Fred Armstrong was the president of American Capital Insurance Company and a director of the Central National Bank.

In June of 1966, American Capital Insurance Company and Production National Life Insurance Company merged.

On November 30, 1966, N.F.C. filed its original petition naming as defendants the Central National Bank and Paul L. Malloy, a vice-president of the Central National Bank. The plaintiff's original petition alleged that the defendant, Central National Bank, had violated its obligation as trustee in selling the 46,572 shares in P.N.C. for $3.10 per share. N.F.C. contended that the shares had a value in excess of $5.10 per share. N.F.C. further alleged that the trustee had sold more shares of stock than was necessary to discharge the indebtedness owing to the Central National Bank.

On May 2, 1968, N.F.C. filed its first amended original petition naming as defendants the Central National Bank, John N. Hunt, the American Capital Insurance Company, and Fred Armstrong. Paul L. Malloy was not named as a party in said amended petition or any other subsequent pleadings. The basis of the plaintiff's first amended original petition, and all subsequent pleadings of the plaintiff, was an alleged civil conspiracy between Fred Armstrong, American Capital Insurance Company, John N. Hunt and the Central National Bank to defraud N.F.C. of its interest in P.N.C. In support of the allegation of conspiracy, N.F.C. points to several factors. It is alleged that Fred Armstrong was at all times a director of Central National Bank; that Fred Armstrong served on the Loan Committee of Central National Bank during the relevant time period; and that there arose a fiduciary obligation upon both the Central National Bank and Fred Armstrong as a result of the pledge by N.F.C. of its 46,572 shares of stock in P.N.C. N.F.C. also contends that the prior display of interest by American Capital Insurance Company in P.N.C., the use of Robert Grantham as a 'straw man' in the purchase of the P.N.C. shares, and the complicity of the Central National Bank in arranging the purchase money for Grantham through the Republic National Bank of Dallas all support the allegation of conspiracy. Finally, N.F.C. alleges that the 46,572 shares of stock in P.N.C. represented ten percent of P.N.C.'s outstanding capital stock, represented an effective control block on the issue of merger, and that such fact was known by the defendants who, by fraud, sought to divest N.F.C. of such right of control at less than the actual market value of such right of control.

The defendants, in answer to the plaintiff's numerous petitions, pled that the claims of N.F.C. were barred by the two year statute of limitations, and alternatively, that N.F.C. failed to allege facts giving rise to a cause of action.

The claims asserted by N.F.C. are governed by Vernon's Tex.Rev.Civ .Stat.Ann. art. 5526 (1958). Quinn v. Press, 135 Tex. 60, 140 S.W.2d 438 (1940) (fraud); Couch v. Sparger, 252 S.W. 817 (Tex.Civ.App.-San Antonio 1923, no writ) (resulting trust); Andes v. Cagle, 468 S.W.2d 513 (Tex.Civ.App.-Houston (14th Dist.) 1971, writ ref'd n.r.e.) (conversion); International Bankers Life Ins. Co. v. Holloway, 368 S.W.2d 567 (Tex.Sup.1963) (breach of a fiduciary obligation); Linkenhoger v. American Fidelity & Casualty Co., Inc., 152 Tex. 534, 260 S.W.2d 884 (1953) (general tort action). The...