Lane v. PetersonLane v. Peterson
- Reporters:
- Before:
- John R. Gibson, Magill, Bright
Ronald A. May, Little Rock, Ark., for appellees.
Before JOHN R. GIBSON and MAGILL, Circuit Judges, and BRIGHT, Senior Circuit Judge.
JOHN R. GIBSON, Circuit Judge.
Clift and Dorothy Lane, after serious business reversals and bankruptcy, transferred the stock in their several corporations to a panel established by their reorganization plan. The panel, John Peterson, Jr., Walter W. Minger and Edward H. Covell, sold the stock for $35 million less than one year after the transfer, and the Lanes filed this diversity action seeking to recover the stock or participate in the sale proceeds. Following a five-day bench trial, the district court1 denied all relief. On appeal, the Lanes argue that the district court erred in failing to impose a constructive trust on the sale proceeds. Peterson, Minger and Covell cross-appeal, arguing that the court erred in failing to impose
The Lanes, devoted some 35 years to creating and develoрing their poultry business. They organized and were the initial subscribers to all of the stock of the “Lane Companies.”2 In the early 1980‘s the Companies experienced severe financial problems and the Lanes and the Lane Companies filed petitions for reorganization under
The Lanes selected Peterson, Minger and Covell to serve on the Special Panel. Following their appointment, the Lanes continued to operate the Companies. The Panelists performed their duties as specified in the plan, recommending several changes to the Lanes regarding the operations of the Companies, but the Lanes rejected their advice.
From the confirmation of the plan through June 1985 the Companies’ losses escalated. By the end of June the stockholders’ equity in the Companies fell to a negative $8.2 million, with losses for the last twelve months exceeding $8.9 million.3 In early July 1985 it became apparent that the Companies could not meet the scheduled payments under the plan and that default, which would occur on August 2, 1985, was inevitable. Because the Lanes had executed personal guarantees to secure much of the needed capital for operatiоns, personal assets of the Lanes, valued at more than $1 million would be subject to creditors’ claims. In a letter dated July 5, William Sullivan, counsel for the Lanes and the Lane Companies, advised the Lanes that it would be in their “personal financial interest to turn the Companies over to the Special Panel in the best condition possible so that the Special Panel would have a chance to avoid liquidation.” Dorothy Lane suggested to Peterson that if she and Clift could be released from the personal guarantees, they would relinquish control of the Companies. The Lane Company creditors considered, but rejected, this proposal in the early part of July.
On July 17, 1985, the Panel met and agreed that they would accept an early takeover of the Companies, as requested by the Lanes, if the Lanes relinquished all control and power in the Companies, including a transfer of all their stock.4 The Panel cоnveyed their proposal to Sullivan, who immediately contacted Dorothy Lane. While the Panel was still meeting, Sullivan relayed the Lanes’ acceptance of the proposal.
The initial proposal was to “turn the stock back to the Companies.” However, after assessing the ramification of such a transaction, Sullivan realized that the Companies could not operate without оutstanding stock. Thus, Sullivan suggested transferring the stock to the Panelists as trustees under a Declaration of Trust for the benefit of the Lane Company employees. This idea was not conveyed to the Lanes.
Sullivan prepared the necessary documents to execute the transaction and the agreement was formalized at the Company offices on July 22, 1985. Sullivan explained each document to the Lаnes who had the opportunity to ask any questions.5 The Lanes resigned as officers and directors of each of the corporations and Peterson, Minger and Covell were elected to these positions. A consulting agreement executed between the Lanes and the Lane Companies provided each of the Lanes with $100,000 in return for a one-year consulting arrangement. The Lanes exeсuted a Stock Transfer agreement transferring their stock to the Panelists as trustees under a Declaration of Trust. The Declaration of Trust was executed only by Peterson, Minger and Covell. Peterson denied the Lanes’ request to see a copy of the trust instrument “because it did not pertain to the Lanes and it was not a document they needed to review or sign.” After the closing Dorothy Lane stated, “better that thе Companies go down with you than with us.” The Lanes were provided with a press release reflecting that they had relinquished “total control over the corporate stock and other assets.”
The Panelists then acted decisively and vigorously. They abandoned a product line and streamlined operations and management. They shut down one plant and increased operations at others. The Panel negotiated with creditors who agreed to reduce some of their claims. The Panel implemented a quality control plan as well as a marketing plan. Cash flow stabilized as a result of a contract the Panel negotiated with Tyson Foods. Quality and efficiency improved. The Panel sold one of the divisions for a $3 million profit. In addition, the poultry market stabilized and prices increased about 2 cents per pound from June 1985 to March 1986. Chicken feed costs declined and this decreased the expenses.
In May 1986 the Panel, acting as trustees under the trust, sold the Lane Companies stock to Tyson Foods, Inc. for $35 million. Following news of the sale, the Lanes brought suit seeking to rescind their agreement and assume control of the assets, or in the alternative to share in the sale proceeds. The district court denied all relief to the Lanes finding that: (1) the Panel members did not breach any fiduciary duties owed to the Lanes; (2) there was no fraud or other inequitable conduct on the part of the Panel; (3) the transaction, as consummated, reflected the agreement of the parties; (4) adequate consideration existed to support the agreement; and (5) the agreement was not unconscionable. Based on these findings, the court concluded that the Lanes failed to prove that a constructive trust should be imposed on the sale proceeds. On appeal, the Lanes do not attack the district court‘s interpretation of Arkansas law; instead, they urge that the court‘s factual findings are incorrect.6 We review findings of fact under the clearly erroneous standard, giving due regard to the opportunity of the district cоurt to judge the credibility of witnesses. Anderson v. Bessemer City, 470 U.S. 564, 573 (1985) (interpreting
A constructive trust is an equitable remedy which may be imposed if it is shown by clear, cogent and convincing evidence that property is acquired by fraud or breach of a fiduciary duty. Bramlett v. Selman, 268 Ark. 457, 597 S.W.2d 80, 84-85 (1980); Horton v. Koner, 12 Ark.App. 38, 671 S.W.2d 235, 238 (1984). The Lanes do not argue that the Panelists acquired the stock fraudulently; rather, they offer numerous arguments that the district court should have imposed a constructive trust because the Panel breached fiduciary duties owed to the Lanes. The district court did not decide whether the Panel stood in a fiduciary capacity toward the Lanes. Instead, the court reasoned that even if a fiduciary relationship existed, the Panelists breached no duty owed.
A.
The Lanes first argue that a constructive trust should be imposed because the Panelists breached their fiduciary duty by acquiring the stock. They urge that the acquisition was improper because a fiduciary is prohibited from acquiring the property of his principal. Johnson v. Umsted, 64 F.2d 316 (8th Cir.1933); Hindman v. O‘Connor, 54 Ark. 627, 16 S.W. 1052 (1891). Despite the terms of the trust which state that the trust is established for the benefit of the company employees, the Lanes contend that the Panelists reserved absolute discretion regarding the distribution of the trust corpus and the transfer was therefore in substance tо them. The evidence does not support this claim. The Panelists testified that they have made no final decision on how the proceeds ultimately will be distributed, but that they do not intend to convert the stock for their exclusive benefit and that they only expect to share in the proceeds as 3 of the more than 1000 employees. The district court did not err in concluding that the Panelists did not breach any fiduciary duty by acquiring the stock.
B.
Next, the Lanes contend that a constructive trust should be imposed because the Panelists breached a fiduciary duty by failing to advise them of Tyson Foods’ interest in purchasing the Companies. In late June of 1985, Tyson Foods had approached Minger about a possible acquisition of the Lane operations. The district court found, however, that Tyson‘s “offer to purchase” was merely an interest in operating the Companies for a 60-day period, before determining whether they wanted to purchase the Companies, conditioned on the Lanes being out of the operation. The district court found this disclosure would have served no useful purpose because Clift Lane harbored an intense dislike for Don Tyson and would have suffered bankruptcy rather than sell the operations to him. These findings are fully supported by the record. The district court did not err in concluding that the Panelists’ failure to disclose this information resulted in no violation of fiduciary duties.
II.
The Lanes next contend that the district court erred in failing to impose a constructive trust on the sale proceeds because the transaction, as consummated, did not reflect the oral agreement between the parties. The Lanes maintain thаt it requires a “broad jump of illogical proportions” to say that creating a trust for the benefit of the employees reflected the transaction agreed to, that is, “turning the stock back into the company.” The district court found, however, that the stock transfer agreement contained an integration clause, specifically stating that the written agreement set forth the entire agreement and undеrstanding of the parties. Under the terms of the agreement, the Lanes transferred unequivocally all stock and responsibilities of ownership to the Panelists under a Declaration of Trust. Moreover, the district court found that the only variation between the proposal and the transaction was how, once transferred, the stock would be held. The court found this variation to be immaterial because the Lаnes wanted only to rid themselves of the duties and responsibilities associated with the direction of the Companies and more specifically, the risk of default and foreclosure on their personal guaranties. These findings are fully supported by the record. Accordingly, the district court did not err in concluding that the transaction as consummated reflected the agreement of the parties.7
The Lanes argue that the district court erred in failing to impose a constructive trust on the sale proceeds because the stock transfer was not supported by adequate consideration. Because of the inevitability of default, the Lanes maintain that the Panelists took over the Companies only ten days before they would have been required to under the Plan and that this was therefore insufficient consideration to support their agreement. See St. Louis IM & S Ry. Co. v. Jones, 93 Ark. 537, 125 S.W. 1025 (1910); Crookham and Vessels, Inc. v. Larry Moyer Trucking, Inc., 16 Ark.App. 214, 699 S.W.2d 414, 416 (1985). It was only by turning over the Companies’ to the Panelists, however, that the Lanes could hope to shelter their personal assets. In the course of events, the Panelists preserved the Lanes’ assets by avoiding liquidation. The Lanes also received a $100,000 consulting agreement.8 Accordingly, the district court did not err in concluding that adequate consideration existed to support the agreement.9
IV.
Finally, the Lanes contend that the district court erred in failing to impose a constructive trust to prevent unjust enrichment of the Panel and employees. See Orsini v. Commercial Nat‘l Bank, 6 Ark.App. 166, 639 S.W.2d 516, 518 (1982). The Lanes vigorously contend that the stock had substantial value at the time was transferred and therefore the Panelists were unjustly enriched at their expense. Although the district court noted that it was the opinion of the Panelists that the stock was worthless at the time it was transferred, the court made no specific finding concerning the pre-transfer stock value. On appeal, the Lanes point to no persuasive testimony in the record as to this value.10 In any event, we cannot conclude there was unjust enrichment here. The Lanes absolved thеmselves of the bankrupt Companies, in return they received a consulting contract and ultimate relief from foreclosure on their personal guarantees. Moreover, the district court specifically found that without the efforts of the Panel (and the employees), the Companies would have been forced into liquidation. The Panelists assumed the responsibilities of running the Companies. They invested their timе, energies and expertise into making the Companies profitable. The district court did not err in failing to impose a constructive trust to prevent unjust enrichment.
V.
The Panelists appeal the district court‘s denial of their motion for sanctions under