State Nat. Bank of El Paso v. Farah Mfg. Co., Inc.

• Decision Date: 29 August 1984
• Docket Number: No. 08-82-00160-CV,08-82-00160-CV
• Citation: 678 S.W.2d 661
• Parties: 40 UCC Rep.Serv. 764 STATE NATIONAL BANK OF EL PASO, Appellant, v. FARAH MANUFACTURING COMPANY, INC., Appellee.
• Court: Texas Court of Appeals

Page 661

678 S.W.2d 661

40 UCC Rep.Serv. 764

STATE NATIONAL BANK OF EL PASO, Appellant, v. FARAH MANUFACTURING COMPANY, INC., Appellee.

No. 08-82-00160-CV.

Court of Appeals of Texas El Paso.

Aug. 29, 1984.

Rehearing Denied Nov. 7, 1984.

Marvin S. Sloman, Robert L. Blumenthal, Carrington, Coleman, Sloman & Blumenthal, Dallas, Robert J. Hearon, Jr., Pamela Stanton Baron, Graves, Dougherty, Hearon & Moody, Austin, Raymond C. Caballero, El Paso, for appellant.

Tom Thomas, Kolodey, Thomas, Dooley & Yeager, Dallas, for appellee.

Before STEPHEN F. PRESLAR, C.J., and WARD and SCHULTE, JJ.

OPINION

SCHULTE, Justice.

This case centers around a management change clause contained in a $22,000,000.00 loan agreement. The jury found Appellant bank, acting alone or in conspiracy with any of the other lenders, committed acts of fraud, duress and interference, proximately resulting in damages to Appellee, and set damages at $18,947,348.77. We reform and affirm.

The management change clause set forth in Section 6.1(g) of the February 14, 1977, loan agreement made it an event of default if there occurred:

Any change in the office of President and Chief Executive Officer of Farah [Manufacturing Company, Inc.] or any other change in the executive management of Farah [Manufacturing Company, Inc.] which any two Banks shall consider, for any reason whatsoever, to be adverse to the interests of the Banks.

For space economy we will refer to individuals involved by surnames only unless the same surname for different individuals requires the addition of a given name or initials for clarity. William F. Farah will be referred to as Farah. His son, Jimmy Farah will be J. Farah; Farah Manufacturing Company, Inc. will be denoted by the initials FMC. The State National Bank of El Paso will be State National; Continental Illinois National Bank and Trust Company of Chicago will be merely Continental; Republic Bank Dallas N.A. (formerly Republic National Bank of Dallas) will be Republic; The Prudential Insurance Company of America will be called Prudential. Prudential was a separate creditor of FMC pursuant to a 1971 loan agreement. An amended and restated creditors' agreement included Prudential and was made part of the February 14, 1977, loan agreement. Where dates indicate a month only, the year intended is 1977; otherwise the year will be shown. Chief Executive Officer will be denoted as CEO; Chief Operating Officer by the letters COO.

As to the facts, certain events require preliminary mention. FMC began in 1919 as a family owned apparel manufacturer. Farah became CEO in 1964. In 1967 FMC went public. By 1970, the company had plants in Texas and overseas with annual sales of $136,000,000.00. Beginning in 1972, the firm suffered a strike and a nationwide boycott. The strike was settled in 1974. During the period 1972-1976 FMC experienced a pre-tax loss of $43,965,000.00. On July 9, 1976, the FMC Board named one of its members, Leone, as CEO of FMC replacing Farah. On February 14, 1977, a preexisting loan agreement between FMC, State National, Continental and Republic was amended and included the management change clause previously set forth. At the following March 7 Annual Directors' Meeting, Farah made a presentation to be reinstated as CEO. Within days thereafter, Frost, Kozmetsky, Leone and Lerner resigned as directors. Leone remained, however, as CEO. On March 14, Farah made his management presentation to the lenders at Republic in Dallas. Republic was the agent bank for the lenders. Two days later, Farah met Bunten, Senior Vice-President of Republic, on an airplane going to New York. Farah testified that as a result of what he understood Bunten to say, regarding FMC management, he (Farah) cut his New York merger effort short and returned to El Paso, Texas, to prepare to resume control of FMC as CEO. Conroy, a director of FMC, as well as of State National, let the lenders know that he too was available to be CEO. On March 15, Bunten of Republic named Tom Foster of Republic to handle the FMC loan. Tom Foster hired attorney Donohoe to assist him. On March 18, the FMC Board reconvened. Farah pressed his bid to be CEO. Azar was elected a director. Director Gordon Foster was designated to ask the lenders for their position on a management change. On March 19, Conroy met with Azar, the possible swing director, to urge his own candidacy for CEO. Azar initially rejected Conroy. The next day Conroy met with Houghton, a State National vice-president, who had previously worked for Farah at FMC. Houghton tried to discourage Azar's support of Farah. On March 21, the lenders met again at Republic in Dallas and Tom Foster and attorney Donohoe left for El Paso. On March 22, Donohoe drafted and Tom Foster signed and delivered the lenders' response to the management query from the FMC Board. That day also saw a meeting between the lenders and Director Gordon Foster, and a meeting between the lenders and Conroy. On March 23, the lenders faced Azar and Farah; Conroy was elected CEO replacing Leone and Gordon Foster was elected Chairman replacing Farah. On the same day, Continental met with consultant Galef. On April 4, the following were elected to the FMC Board: Pulley, a recently retired Republic officer who had originally approved the FMC loan; Williams, who was also a director of State National; and Jaynes, who had originally declined, asserting a conflict of interest, and reconsidered at the request of Gordon Foster.

On May 27, at the instance of the lenders, FMC hired Galef as consultant. On July 30, Conroy resigned as CEO and Galef was elected to that office. The fall of 1977 saw litigation between Farah and the directors. The terms of the settlement released the directors from all claims asserted in this present suit. Under Galef, on October 4-6, some FMC machinery was auctioned and sold. On November 15, the mill auction was held. During November both Farah and Azar resigned from the FMC Board. In January, 1978, Farah initiated his proxy fight. In that regard in March 1978, Farah prevailed in litigation brought against him by Clifford and Virginia Farah to remove Farah as trustee under the trust holding their stock. The loan was restructured on April 3, 1978. Four days later Galef was out and Farah was again CEO of FMC.

State National Bank, defendant below and Appellant here, characterizes the case as one arising out of warnings issued to FMC in March, 1977, by Republic, State National and Continental in reliance on the management change clause above set forth. Appellant's position is that when Farah attempted to persuade FMC's board to elect him CEO, the banks stated their intent to enforce their right under the loan agreement to treat Farah's election as a default and call their loan. Appellant insists that the warnings of the banks did not exceed their legal rights under the change clause (and otherwise) and further that FMC failed to adduce evidence to establish a cognizable cause of action. State National maintains that the banks made the loan to FMC in reliance upon FMC's assurances in 1976 that the company was under new management and that the banks would be protected by the management change clause against any future change in management. It is also maintained by State National that the covenant was a provision freely given by FMC, that it was undisputedly lawful, and that the subsequently strengthened and amended clause was approved by the entire FMC board with the clear understanding that the covenant could be used to resist an effort by Farah to return as CEO.

On the other hand, FMC, plaintiff below and Appellee here, asserts the general position that under the management change clause, when it became apparent that Farah was about to regain control of FMC, which was unacceptable to the banks, that the banks had two legitimate options. They could attempt to call the loan or elect not to and live with Farah as CEO. Instead, Appellee maintains, the banks chose a third option and unlawfully prevented Farah's election and installed directors and officers to keep Farah out of management. The claim is made that the "hand picked minions" mismanaged the company and stripped it of valuable assets for unnecessary loan prepayments. Further, Appellee asserts, when the banks defrauded and coerced FMC's directors to prevent Farah's return to management, they defrauded and coerced FMC itself. When they installed their own choice of management, stacked the FMC board and undertook the actions to exclude Farah from management, the banks interfered with FMC's management and corporate governance rights through an unlawful course of conduct marked with deception and coercion. These alleged wrongful acts are stated to have proximately caused damages to FMC in two respects. First, the incompetent management installed and perpetuated by the banks resulted in losses and auction sale damages. Second, their preventing the election of competent management caused losses and lost profits. Appellee finally contends Farah fought his way back into control, saved the company from bankruptcy and restored it to profitability.

The case before us was in trial for over two months, resulting in a statement of facts of some seven thousand pages and exhibits of over two thousand pages. The jury of twelve received the case on December 30, 1981, and returned its verdict on January 13, 1982. Ten members of the jury in response to special issues found that the State National, acting alone or in conspiracy with any of the other lenders, at any time after February, 1977, committed any act or acts of:

Question No. 1A. Fraud

Question No. 1B. Duress

Question No. 1C. Interference

Question No. 2. Proximately causing as to 1A, 1B and 1C, damages to FMC as follows: (conditioned on an affirmative answer to any or all of 1A, 1B, or 1C above)

Question No. 3A. Actual losses after March 23, 1977--$2,668,000.00.

Question No. 3B. Lost profits after March 23, 1977--$15,482,50...