Ramo, Inc. v. English
| Decision Date | 19 September 1973 |
| Docket Number | No. B--3202,B--3202 |
| Citation | 500 S.W.2d 461 |
| Parties | RAMO, INC., et al., Petitioners, v. H. E. ENGLISH et al., Respondents. |
| Court | Texas Supreme Court |
Clark, Thomas, Harris, Denius & Winters, Donald S. Thomas, Sander W. Shapiro and Mary Joe Carroll, Austin, for petitioners.
Johnson, Bromberg, Leeds & Riggs, Louis P. Bickel, Muse, Currie & Kohen, Ralph Currie, Burford, Ryburn & Ford, Logan Ford and J. Dan Bohannan, Jackson, Walker, Winstead, Cantwell & Miller, J. Robert Norris, Jr., Dallas, for respondents.
We are concerned here with the construction and application of certain provisions in instruments exchanged by the buyers and sellers when the stock of a motor freight transportation company was sold several years ago. The sellers are seeking to accelerate the maturity of notes given as part of the purchase price, while the buyer is attempting to prevent acceleration and to recover damages for alleged breaches of warranties made by sellers in connection with the sale.
H. E. English and several members of his family, hereinafter referred to as English, were the original owners of Red Ball Motor Freight, Inc. They agreed to sell all the stock of Red Ball to Ramo, Inc., a corporation controlled by Texas Capital Corporation, now Telecom Corporation and hereinafter referred to as Telecom. The agreed price for Red Ball and its two wholly owned subsidiaries 1 was $15,500,000, payable $4,000,000 in cash and the balance evidenced by Ramo's notes aggregating $11,500,000. The sale was consummated on June 21, 1968, by exchange of the following instruments: (1) a series of nine notes executed by Ramo in the aggregate principal amount of $11,500,000 and payable to different members of the English family; (2) a noteholders' security agreement executed by Ramo, English, Red Ball and Telecom; (3) an instrument of representations, warranties, covenants and agreements executed by English; and (4) an instrument of representations and warranties executed by Ramo and Telecom. The notes, payment of which was guaranteed by Telecom, bear interest at the rate of 5% Per annum and are payable as follows: (a) Nos. 1, 2 and 3 aggregating $3,188,000 matured on January 2, 1969; (b) Nos. 4, 5 and 6 aggregating $2,493,600 are payable in quarterly installments beginning January 2, 1972; and (c) Nos. 7, 8 and 9 aggregating $5,818,400 are payable in quarterly installments beginning January 1, 1975.
All amounts accruing on the notes have been paid as they matured, and there is no complaint in that regard. The balance unpaid on the principal of the notes at the time of trial was $8,132,000. About a year after the sale was consummated, English notified Ramo and Red Ball that the lease by the latter of certain certificates of necessity constituted an act of default under the security agreement. A few weeks later, Ramo, Red Ball and Telecom were notified that the sale of certain real estate might constitute an act of default. English also filed an affidavit in each county in which a Red Ball subsidiary owned land for the purpose of preventing the sale of real estate.
Ramo, Red Ball and Telecom, who together are referred to herein as Ramo-Tel, then instituted the present suit against English for a declaratory judgment construing the security agreement, to recover damages for alleged breaches of warranty, and to obtain injunctive relief preventing a foreclosure for any of the asserted acts of default that occurred prior to institution of suit and requiring that the affidavit be expunged from the records. English filed a cross action alleging 24 separate acts of default under the security agreement and that the maturity of the notes had been accelerated as authorized by the agreement, and praying for the recovery of the balance unpaid on all the notes, plus interest and attorneys' fees, and for foreclosure of the lien securing the notes.
The case was tried to a jury, and one of the jury's findings was disregarded by the trial court on motion of Ramo-Tel. On the basis of the other findings and its construction of the various instruments, the trial court rendered judgment: (1) construing the security agreement substantially in accordance with the contentions of Ramo-Tel; (2) granting Ramo a setoff of $787,500 for breach of warranty; (3) expunging the affidavit and granting the injunctive relief sought by Ramo-Tel; and (4) denying English any recovery on the cross action. The Court of Civil Appeals upheld the award to Ramo for breach of warranty but concluded that certain cash advances by Red Ball to Ramo constituted dividends as a matter of law, that the distributions were in violation of the security agreement, and that English was entitled to accelerate maturity of the notes and foreclose the lien securing same. The judgment of the trial court was accordingly reversed and the cause was remanded to the district court with instructions to render judgment on the notes for the balance unpaid thereon, plus interest and attorneys' fees, less the amount of the offset for breach of warranty as found by the jury, and for foreclosure of the lien on the Red Ball stock. Tex.Civ.App., 474 S.W.2d 600.
All parties filed applications for writ of error. The application of Ramo-Tel was granted because we were of the tentative view that the Court of Civil Appeals erred in concluding that it could not properly order a general remand in the interest of justice. The application of English was granted because of the granting of the Ramo-Tel application. After further consideration it is our opinion that the Court of Civil Appeals erred in holding that an act of default entitling English to accelerate maturity of the notes was established as a matter of law.
Sections 5 and 6 of the security agreement provide for acceleration of maturity in the following terms:
5. Events of Default. Any of the following events shall constitute a default hereunder:
(e) . . .; or if the Debtor defaults in the performance of any covenant, condition or agreement contained in this Agreement, and if such default mentioned in this paragraph shall not have been remedied to the satisfaction of the holders of the Notes issued hereunder, within thirty (30) days after written notice thereof shall have been received by the Debtor from such holder or holders, same shall constitute an act of default.
6. Remedies upon Default. Upon default of the Debtor, as defined in this agreement, the holder of any Note issued hereunder may, at the option of such holder, mature the entire indebtedness of said Notes, and may, by written notice to the Debtor and the Trustee, declare the Notes issued hereunder to be, and such Notes shall thereupon become, forthwith due and payable, without any presentment, demand, protest or other notice of any kind (save as provided herein), all of which are hereby expressly waived, anything contained herein or in any of the Notes to the contrary notwithstanding . . ..
The Court of Civil Appeals held that breach of the following dividend limitation, set out in Section 7 of the security agreement, was established by the evidence as a matter of law:
7. Covenants of Debtor. So long as any of the Notes issued hereunder are outstanding, Debtor covenants and agrees:
(e) Dividends. Red Ball may cause its Subsidiaries to issue and pay cash dividends to Red Ball in such amounts as shall be deemed advisable by the directors of said corporation. Debtor may likewise cause Red Ball to declare and pay cash dividends to Debtor on its outstanding capital stock, except that such dividends may only be declared out of profits accruing after the date of this agreement, and no dividends shall be declared or paid which would reduce the continued capital and surplus of Red Ball and its subsidiaries below the aggregate capital and surplus, as of March 31, 1968.
During the period from June 24, 1968, to October 1, 1969, cash advances aggregating $2,272,375.81 were made by Red Ball to or for the benefit of Ramo. English contends and the Court of Civil Appeals held that the payments constitute dividends within the meaning of the security agreement, while Ramo insists that they were loans. Only one issue relating to these contentions was submitted to the jury. This was Special Issue No. 18. In response thereto the jury found that on the occasion of each transfer of funds by Red Ball to Ramo, the latter at the time had no intention of repaying the same. On motion of Ramo-Tel the finding was disregarded by the trial court as immaterial.
Telecom owns 89% Of the stock of Ramo, and Ramo owns all the stock of Red Ball. According to the testimony of Grogan Lord, who is Chairman of the Board of each company, the three were run just like one company. Five of the six Red Ball directors are also directors of Telecom, and four of the six Red Ball directors are also directors of Ramo. The initial and major advance of $1,500,000, which was used by Ramo to make part of the cash payment to English, was authorized by Red Ball's board of directors. The minutes of the meeting state, in part, that:
The Chairman announced that the next order of business was to cause Red Ball Motor Freight, Inc., to loan to Ramo, Inc., the sum of $1,500,000. Whereupon, upon motion duly made and seconded, it was unanimously
Resolved that the corporation loan to Ramo, Inc., on an open account payable on demand, the sum of $1,500,000.
There are no resolutions by Red Ball's board of directors authorizing any of the advances except the first, and there are no resolutions by Ramo's board of directors concerning any of the advances. Each of the transactions was entered on Red Ball's books as 'advance receivable,' and on Ramo's books as 'advance payable.' All of the advances were authorized by Grogan Lord, and the several transactions were handled by the Vice-President for finance of Red Ball. A new President chosen to head Red Ball shortly after the sale was closed did not know of the advances.
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