Security Bank & Trust Co. of Ponca City, Okl. v. Fabricating, Inc.

Decision Date01 October 1972
PartiesSECURITY BANK & TRUST COMPANY OF PONCA CITY, OKLAHOMA, and The Town of Grand Junction, Tennessee, Plaintiffs, v. FABRICATING, INC., E.C. Holman and Charles E. Bruce, and Walter Podrog, L.J. Perry, J.W. Caperton, Union Planters National Bank, and all Known Bondholders of Town of Grand Junction Bonds Date
CourtTennessee Supreme Court

H. Morris Denton, Bolivar, Agnes Thornton Bird, Frank B. Bird, Maryville, for counter-plaintiffs-appellants; Denton & Cary, Bolivar, Bird, Navratil & Bird, Maryville, of counsel.

Leo Bearman, Jr., Memphis, for counter-defendants-appellees; Heiskell, Donelson, Bearman, Adams, Williams & Kirsch, Memphis, of counsel.

OPINION

BROCK, Justice.

As the parties are presently aligned, this is a class action brought by representatives of a class of bondholders of the Town of Grand Junction, Tennessee, against the law firm of Waring, Cox, James, Sklar & Allen for damages resulting from alleged malpractice.

A judgment was rendered in favor of the bondholders against the Waring firm and against the Town of Grand Junction in the Chancery Court for Hardeman County, but the judgment against the Waring firm was reversed by the Court of Appeals, as was the judgment against the Town of Grand Junction, and the cause was dismissed as to both defendants. We granted the application of the bondholders for an appeal from the judgment of the Court of Appeals, limited to a consideration of the "issues that relate to the statutes of limitation as they may apply to the class' actions against the law firm of Waring, Cox, James, Sklar & Allen."

I

This controversy arose out of the issuance of industrial revenue bonds by the Town of Grand Junction, Tennessee, for the purpose of financing the construction of a manufacturing plant to build modular motel rooms. Half of the bonds were issued in October, 1972, and the other half were issued in November, 1972; their default occurred on October 1, 1974.

The Mayor of Grand Junction, Carl Dunn, Jr., had been contacted by Charles Bruce, a former resident of Grand Junction who had moved to Texas. It appears that Bruce was an old friend of the Dunn family and enjoyed a good reputation in Grand Junction. Bruce and his partner, E.C. Holman, proposed to form a corporation to be known as Fabricating, Inc., which would operate the above mentioned manufacturing plant on land leased from the Town of Grand Junction; the whole venture was to be financed through the proposed issuance of industrial revenue bonds by the Town, the bonds to be repaid through rents received by the Town from the proposed corporation lessee. Bruce and Holman proposed to, and did, personally guarantee the bond issue and in support of these guaranties submitted financial statements of their personal estates and financial condition which purported to have been prepared by Lester H. Centu, a Certified Public Accountant.

The Town of Grand Junction employed Mr. Jerald Sklar, an attorney with the law firm of Waring, Cox, James, Sklar & Allen, to serve as special bond counsel to the Town for the purpose of passing upon the legality and non-taxability of the proposed bond issue, for the preparation of the lease to Fabricating, Inc., and a trust indenture and, of special interest in this litigation, for the preparation of the offering circular which was employed in the issuance and merchandising of the bond issue. The Security Bank & Trust Company of Ponca City, Oklahoma, served as trustee under the revenue bond issue and, as such, held the funds received from the bond issue and disbursed them as the plant was built.

The purported financial statements of Bruce and Holman were attached to the offering circular used in the promotion of the bond issue.

The bond coupons falling due on October 1, 1974, defaulted.

It was learned that Bruce and Holman did not have the assets reflected on their financial statements and that Lester Centu was not a Certified Public Accountant.

One of the holders of the defaulted bonds was Walter Podrog of Palm Beach, Florida, who possessed a law degree and was experienced in both general obligation and revenue bonds. As the owner of $10,000.00 worth of the defaulted bonds, Mr. Podrog began a personal investigation into the reasons for the default. He contacted the defendant attorney Jerald Sklar, Charles Johnson, the attorney for the Trustee bank, Larry Stephenson, President of the bank, and Mayor Dunn and others. On May 15, 1975, Mr. Podrog wrote a letter to attorney Charles Johnson in which he contended that the Town, the Mayor, the council, the law firm of Waring, Cox, James, Sklar & Allen, and others were aware of the true character of the guarantors, Bruce and Holman, but had failed to check into their financial statements, much to the serious detriment of the bondholders. Then, on July 21, 1975, Mr. Podrog wrote a letter to the Trustee bank recommending that civil suit be instituted on behalf of all bondholders against the Town, the Mayor, the council, the law firm of Waring, Cox, James, Sklar & Allen, Ewing Harris, the general counsel for the Town of Grand Junction, Tennessee, and the underwriters of the bond issue for causing the loss suffered by the bondholders. Still later, on September 30, 1975, Mr. Podrog wrote a letter to all bondholders in which he stated:

"The correspondence, telephone calls and inquiries, including a personal visit to Grand Junction, convinced me that this ill-fated promotion was fraudulently inspired from the start. All involved in the promotion and ultimate sale of bonds were at least negligent in permitting false financial statements and apparent forged CPA certifications to be publicized and circulated as true. One of the guarantors was Mayor Dunn's employer and presently is a partner in the Tennessee Pewter Company being operated in a portion of subject premises. An apparent $300,000.00 windfall profit was made by guarantors and/or others.

* * *

"After the total losses of bondholders is determined, civil action for damages should be filed against the Town of Grand Junction, its Mayor, its council, the original underwriters and all attorneys involved in their promotion and sale of the bonds, to the purchasers, due to the carelessness and negligence in permitting fraudulent negligent statements to be published and circulated."

The original complaint in this action was filed on February 10, 1975, in the Chancery Court by the Security Bank & Trust Company of Ponca City, Oklahoma, and the Town of Grand Junction, Tennessee, plaintiffs, against Fabricating, Inc., a corporation, and E.C. Holman and Charles E. Bruce, the two guarantors of the industrial revenue bonds issued by the Town of Grand Junction, dated October 1, 1972, and November 1, 1972. This complaint sought reimbursement of monies due the Bank as trustee of the bond issue when the issue failed and the guarantors refused to make good on their guaranty. This original complaint was amended twice and in the second amended complaint filed on November 24, 1975, the bondholders were named defendants, as a class, and the Trustee Bank sought a declaratory judgment that the actions taken by the Bank, its agents, its attorneys and employees in administering and controlling the bond trust assets and estate had been proper and lawful.

Bondholder Podrog filed an individual answer to this second amended complaint on January 6, 1976, but did not file any counter, cross, or third-party complaint at that time. Bondholders, J. Frank Manning and Walter Podrog, were appointed representatives of the class of bondholders and, as such, filed an answer to the second amended complaint and also filed a third-party complaint against the defendant law firm, Waring, Cox, James, Sklar & Allen, and the members thereof alleging various acts of negligence on the part of Mr. Sklar in performing his duties as bond counsel with respect to the bond issue and particularly with respect to the offering circular which was published and circulated to assist in promoting the sale of the bonds. The primary allegation was that Mr. Sklar should have discovered the falsity of the financial statements of the promoters and guarantors of the bonds, that Mr. "Centu" was not a CPA, that the underwriters of the bond issue in question were under investigation by government agencies with respect to their activities in connection with other securities and that Mr. Sklar's failure to discover and disclose these and other deficiencies was a direct and proximate cause of the loss suffered by the bondholders. The date of the filing of this cross-action against the Sklar firm was November 24, 1976.

At the same time the bondholder class filed a counterclaim against the Security Bank & Trust Company of Ponca City, Oklahoma.

The original suits brought by the Trustee Bank and the Town of Grand Junction against Fabricating, Inc., and the promoters and guarantors, Bruce and Holman, were dismissed. A different suit was filed against Bruce and Holman in Texas in an effort to enforce their contract of guaranty of the bonds. Prior to the trial in the instant cause, the Security Bank & Trust Company of Ponca City, Oklahoma, settled its liability with the bondholder class for a total of $250,000.00 which was approved by the Chancery Court.

Eventually, all that remained for trial was the claim of the bondholder class against...

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