Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Herring Bancorp, Inc. v. Mikkelsen

Court of Appeals of Texas, Seventh District, Amarillo

June 2, 2017

HERRING BANCORP, INC.; C.C. BURGESS; AND C. CAMPBELL BURGESS, APPELLANTS
v.
JOHN MIKKELSEN, ACTING SOLELY IN HIS CAPACITY AS TRUSTEE OF THE JOHN MIKKELSEN TRUST, APPELLEE

         On Appeal from the 46th District Court Wilbarger County, Texas Trial Court No. 24, 955; Honorable Dan Mike Bird, Presiding

          Before QUINN, C.J., and CAMPBELL and PIRTLE, JJ.

          MEMORANDUM OPINION

          Patrick A. Pirtle Justice

         This appeal arises from a minority shareholder claim contesting the validity of a stock redemption purportedly implemented in violation of the articles of incorporation of a closely-held corporation and the related claims of minority oppression and breach of fiduciary duties. Appellants, Herring Bancorp, Inc., C.C. Burgess, and C. Campbell Burgess, contend the trial court erred by setting aside Herring Bancorp's redemption of 300 shares of preferred stock owned by Appellee, John Mikkelsen, in his capacity as Trustee of the John Mikkelsen Trust, because those shares were properly redeemed as part of Herring Bancorp's conversion from a Subchapter C corporation to a Subchapter S corporation.[1] Appellants further contend the minority oppression and breach of fiduciary duty claims are inapposite to the facts of this case, and the trial court erred by awarding the recovery of damages and attorney's fees to Appellee based on any alleged theory. Appellants further assert the trial court erred in failing to award attorney's fees to them. By a cross-appeal, Appellee contends the trial court erred by denying discovery of certain net worth information and by excluding evidence relevant to his claim for exemplary damages. We reverse and render.

         Background

         Herring National Bank became a chartered bank in 1903. From 1982 to 1997, Appellee served as Chairman of that bank. Appellee's wife's family has had ties to Herring National Bank since its founding. Around 1972, C.C. Burgess purchased stock in Herring National Bank and he was elected to its Board of Directors shortly thereafter.

         In 1984, Herring Bancorp, Inc. was formed as a holding company for Herring National Bank. Appellee was a shareholder and he served as Chairman of Herring Bancorp from its inception until 1992. At all times relevant to this matter, C.C. Burgess was also a shareholder and director of Herring Bancorp.

         In 1992, control of Herring Bancorp shifted away from Appellee and in favor of C.C. Burgess and C. Campbell Burgess when a special shareholder's meeting was called and a new Board of Directors was elected. In response to the change in control, certain shareholders (including Appellee) filed a quo warranto lawsuit challenging the newly-elected board. Appellee's interest in the litigation was resolved when he and his family agreed to sell the Burgesses 10, 000 shares, effectively giving control of the corporation to them. In return, Appellee was given a five-year contract to serve as Chairman and Chief Executive Officer of the bank until December 31, 1997. In January of 1998, Appellee sold his remaining 280 shares back to the corporation and was, at that time, completely disassociated with Herring Bancorp and Herring National Bank. Seven years later, in 2005, Appellee's mother passed away and he and his brother, Mallory, each inherited 150 shares of Herring Bancorp preferred stock.

         A year later, Appellee discovered that Herring Bancorp was exploring the possibility of converting from a Subchapter C corporation to a Subchapter S corporation. To comply with Internal Revenue Service requirements, a Subchapter S corporation can only have one class of outstanding capital stock and no more than 100 shareholders, making it necessary for Herring Bancorp to eliminate the preferred class of shares.[2] In order to accomplish the process of consolidating all nonvoting shares into one class, the Board of Directors of Herring Bancorp formed a committee to determine which preferred shares would be exchanged for common stock and which would be redeemed in accordance with the redemption provisions contained in paragraph 5 of the Articles of Incorporation.[3]

         According to the criteria established by that committee, in order to exchange preferred shares for common shares (1) a banking relationship must have existed between the preferred stock shareholder and Herring National Bank and (2) as a result of the conversion, each exchanging shareholder would have to "own at least 50 shares of Common Stock upon the conversion." Subject to these requirements, Herring Bancorp offered all preferred stock shareholders two choices, either (1) exchange their shares of preferred stock for common stock at an exchange rate of 1 share of common stock for every 7.8113 shares of preferred stock or (2) have their shares of preferred stock redeemed in accordance with the terms and provisions of the Articles of Incorporation, as amended. Based on the criteria set, neither Appellee nor his brother was eligible for an exchange of the shares of preferred stock for shares of common stock because, at the conversion rate set, neither would own fewer than 50 shares of common stock upon conversion.[4] Although the shareholders of preferred stock were not offered any other alternatives, at least one shareholder of preferred stock converted a portion of her preferred shares for common shares, while allowing the remaining portion of her preferred shares to be redeemed. Either way, keeping shares of preferred stock was not an option.

         On September 22, 2006, C.C. Burgess wrote Appellee and advised him that going forward with the elimination of the preferred stock class of shares in order to comply with requirements for Subchapter S status would require that his shares of preferred stock be redeemed. Burgess's letter continued "since the conversion factor will result in you and Mallory having only 19 shares of common stock each, we will be sending you and Mallory a letter expressing the Bank's intent to call your preferred stock. We will follow the rules set out in the Herring Bancorp organization papers for preferred stock redemption."

         A notice letter dated October 31, 2006, bearing the salutation "Dear Preferred Stock Shareholder, " was sent to Appellee advising him that as of 5:00 p.m. on November 20, 2006, his preferred stock would be redeemed and "you will cease to be a holder of shares of Preferred Stock as of the Redemption Date and will only be entitled to the receipt of the Redemptive Price." The notice instructed him that in order to receive the redemptive price, he was required to deliver to the designated transfer agent: (1) a duly executed Letter of Transmittal and (2) his preferred stock certificates. That same date, Appellee wrote C.C. Burgess: "[my brother] and I are very sentimental about the preferred stock and wish to convert our preferred stock to common stock. It does not appear that you are nearing the 100 person threshold and I am assured that you are aware of the generational exception." Despite Appellee's request that his shares of preferred stock be exchanged for shares of common stock, on the redemption date, Herring Bancorp redeemed all of the outstanding shares of preferred stock. Specific as to Appellee, Herring Bancorp redeemed his 300 shares of preferred stock and placed sufficient funds to cover the redemptive price in an account in his name.

         By email dated December 19, 2006, Appellee notified Herring Bancorp of a "wrongful redemption" for failing to comply with the Articles of Incorporation. He concluded that he and his brother remained preferred shareholders with the right to examine the books and records of Herring Bancorp. Responses to his emails reflected Herring Bancorp's position that Appellee and his brother were no longer shareholders and were not entitled to any additional information.

         On July 30, 2007, Herring Bancorp's status as a Subchapter S corporation was accepted by the Internal Revenue Service. On February 5, 2008, Appellee was reminded by letter from a law firm that "all" of his shares of preferred stock had been redeemed in 2006 and the funds had been placed in an interest-bearing account available to him as soon as he surrendered the duly executed Letter of Transmittal and his preferred stock certificates. A Letter of Transmittal was never received and delivered and the stock certificates were never surrendered.

         On August 20, 2008, Appellee filed suit against Herring Bancorp alleging that he was injured by the wrongful acts of Appellants in connection with the putative redemption of the 300 shares of preferred stock in 2006. Appellee alleged the redemption constituted a breach of contract based on the Articles of Incorporation of Herring Bancorp, Inc. In addition to seeking to set aside the purported redemption, Appellee further sought a declaratory judgment pertaining to his right to inspect corporate books and records, as well as the recovery of damages for breach of fiduciary duty, civil conspiracy, and oppression of a minority shareholder. Appellants counter-claimed for declaratory judgment regarding the rights of the parties with respect to the Articles of Incorporation, redemption, and tender. They further sought recovery of their own reasonable and necessary attorney's fees.

         On August 4, 2011, the trial court granted a partial summary judgment on Appellee's breach of contract claim, holding that the 2006 redemption of the 300 shares of preferred stock was invalid. The lawsuit continued, however, on his claims of breach of fiduciary duties, civil conspiracy, and unlawful oppression of a minority shareholder. The partial summary judgment ruling prompted Herring Bancorp to once again attempt to redeem Appellee's 300 shares of preferred stock. Consequently, with his lawsuit still pending, on October 30, 2013, Appellee and his brother received a second Notice of Redemption notifying them that the Board of Directors had called for the redemption "of all shares of Preferred Stock" on November 22, 2013.

         By letter dated November 22, 2013, Herring Bancorp made Appellee an unconditional tender in the amount of $115, 548.24 representing more than the redemption price, unpaid dividends, and interest. A cashier's check was issued and tendered; however, that check was never cashed. Following this second purported redemption, Appellee chose to continue prosecution of his lawsuit, amending his pleadings to attack the 2013 redemption on the same basis upon which he had attacked the 2006 redemption.

         Appellee's remaining claims were tried to a jury in January 2015. After the trial court instructed the jury that, as a matter of law, Herring Bancorp had failed to comply with its Articles of Incorporation, the jury awarded $127, 442 as reasonable attorney's fees "in connection" with that failure.[5] In addition, the jury awarded Appellee a total of $60, 000 as reasonably anticipated attorney's fees through the various stages of appeal. The jury also rendered a verdict against C.C. Burgess and C. Campbell Burgess on Appellee's claim of oppression of a minority shareholder, awarding Appellee damages of $23, 314.80. The jury further found that C.C. Burgess breached fiduciary duties owed to Appellee; however, it awarded zero damages. Finally, the jury found against Appellee on his civil conspiracy claim and his claims for exemplary damages.

         Herring Bancorp filed various post-judgment motions challenging the jury's findings; however, those motions were ultimately denied. After incorporating the August 2011 partial summary judgment, the trial court entered its final judgment on June 16, 2015. In its judgment, the trial court (1) found that Herring Bancorp had breached its Articles of Incorporation in the purported redemption of the 300 shares of preferred stock at issue; (2) declared the 2006 and 2013 redemptions to be void- leaving Appellee as a preferred shareholder with the right to inspect the books and records of the corporation; (3) declared that the Burgesses had wrongfully engaged in oppressive conduct towards Appellee; (4) awarded the recovery of $23, 112, representing preferred dividends from October 31, 2006, through December 31, 2014, together with prejudgment interest; and (5) awarded the recovery of attorney's fees in the amount of $127, 442, plus an additional $60, 000 as reasonably anticipated attorney's fees through the various stages of appeal. Herring Bancorp's subsequent motion for new trial was denied and this appeal ensued.

         Presenting nine issues, Appellants maintain that (1) they are entitled to judgment on Appellee's minority oppression claim because it is not a viable cause of action in Texas; (2) the trial court erred by concluding that the 2006 redemption violated the Articles of Incorporation; (3) they are entitled to judgment on Appellee's breach of contract claim because the 2006 redemption complied with the Articles of Incorporation; (4) the trial court erred by concluding that the 2013 redemption violated the Articles of Incorporation; (5) they are entitled to judgment on Appellee's declaratory judgment claim relating to the 2013 redemption; (6) they are entitled to judgment on Appellee's breach of fiduciary duty claims because officers, directors, and majority shareholders do not owe a fiduciary duty to other shareholders or, alternatively, because the evidence was legally and factually insufficient to support the jury's finding of breach; (7) they are entitled to judgment on Appellee's claim for recovery of attorney's fees because (a) the evidence is legally and factually insufficient to show he was entitled to recover any attorney's fees, (b) even if entitled to recover attorney's fees, he failed to properly segregate those fees, and (c) the trial court failed to submit an issue regarding his entitlement to attorney's fees; (8) the ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.