Title: Long v. Lampton

State: arkansas

Issuer: Arkansas Supreme Court

Document:

Charles L. LONG et al. v. Leslie B. LAMPTON
and Ergon, Inc. 

95-774                                             ___ S.W.2d ___

                    Supreme Court of Arkansas
                 Opinion delivered May 28, 1996


1.   New trial -- review of denial of motion for new trial --
     substantial evidence discussed. -- On appeal, the court's
     standard for reviewing the denial of a motion for new trial is
     whether there is any substantial evidence to support the jury
     verdict; in determining the existence of substantial evidence,
     the evidence is viewed in the light most favorable to the
     appellee; evidence favorable to the appellee is given the
     benefit of all reasonable inferences permissible under the
     proof; substantial evidence compels a conclusion one way or
     the other and is more than mere speculation or conjecture. 

2.   New trial -- trial court has discretion in setting aside jury
     verdict -- when verdict should be disturbed. -- While a trial
     court has some discretion in setting aside a jury verdict,
     there is no longer the broad discretion that the supreme court
     formerly recognized; the trial court is not to substitute its
     view of the evidence for that of the jury's unless the jury
     verdict is found to be clearly against the preponderance of
     the evidence; it is only where there is no reasonable
     probability that the incident occurred according to the
     version of the prevailing party or where fair-minded men can
     only draw a contrary conclusion that a jury verdict should be
     disturbed. 

3.   Corporations -- liability for breach of fiduciary duty --
     conduct of directors subject to rigorous scrutiny. -- A person
     standing in a fiduciary relationship with another is subject
     to liability to the other for harm resulting from a breach of
     the duty imposed by the relationship; in the search for
     inherent fairness and good faith to a corporation and
     shareholders, the conduct of directors must be subjected to
     "rigorous scrutiny" when conflicting self-interest is shown;
     the duty of good faith requires "honesty in fact in the
     conduct or transaction concerned." 

4.   Corporations -- no breach of fiduciary duty found -- trial
     court did not err in denying motion for new trial. --   
     The weight and value to be given to the testimony of witnesses
     is in the exclusive province of the jury; here, fair-minded
     persons could conclude that appellee breached no fiduciary
     duty in that loyalty and good faith did not compel him to
     assume, first, that he knew more about the appellants' banking
     relationships than they did, and second, that the appellants,
     who were represented by an attorney in their dealings with the
     bank, needed him to take over negotiations with the bank to
     obtain more favorable terms for their letter of credit; as
     there was substantial evidence to support the verdict, the
     trial court did not err in denying the motion for new trial.

5.   Jury -- duty owed always question of law -- judge has duty to
     instruct jury on law of case with clarity, leaving no grounds
     for mistake. -- The issue of what duty is owed, if any, is
     always a question of law; it is the duty of the judge to
     instruct the jury and each party to the proceeding has the
     right to have the jury instructed upon the law of the case
     with clarity and in such a manner as to leave no grounds for
     misrepresentation or mistake.

6.   Jury -- erroneous instruction -- presumed prejudice may be
     rendered harmless by other factors. -- An erroneous
     instruction which is likely to mislead the jury is
     prejudicial; although the court will presume prejudice from
     the giving of an erroneous instruction, the error may be
     rendered harmless by other factors in the case.

7.   Jury -- instructions to jury not reviewed in isolation --
     instructions should be considered as a whole. -- Jury
     instructions should not be reviewed in isolation, but rather
     considered as a whole in determining whether the applicable
     law has been given to the jury. 
 
8.   Jury -- instruction given was erroneous -- testimony and other
     instructions rendered error harmless. -- Even though an
     erroneous instruction was given, the testimony of appellee and
     the statements of his counsel, along with the instruction that
     advised the jury of the fiduciary duty owed by directors,
     officers, and shareholders of a corporation, rendered it
     harmless.

9.   Corporations -- business-judgment rule -- two elements
     necessary to invoke rule. -- Two elements must be satisfied in
     order for the business-judgment rule to be invoked; first, its
     protection can only be claimed by disinterested directors
     whose conduct otherwise meets the tests of business judgment;
     second, to invoke the rule, directors have a duty to inform
     themselves of all material information reasonably available to
     them prior to making a business decision; having become so
     informed, they must then act with requisite care in discharge
     of their duties.

10.  Corporations -- meaning of "disinterested director" -- when
     director may be disqualified. -- "Disinterested directors"
     does not mean indifferent directors, or directors with no
     stake in the outcome; if that were so, shareholders could
     never be directors or officers; disinterested directors are
     those who neither appear on both sides of the transaction nor
     expect to derive any person financial benefit from it in the
     sense of self-dealing, as opposed to a benefit that devolves
     upon the corporation or all stockholders generally; the
     decisions of disinterested directors will not be disturbed if
     they can be attributed to any rational business purpose; self-
     interest, alone, is not a disqualifying factor even for a
     director; to disqualify a director, for rule-rebuttal
     purposes, there must be evidence of disloyalty.

11.  Corporations -- reliance of business-judgment rule proper --
     no error found. -- Where any benefit from the recapitalization
     plan flowed not only to appellees, but to all other
     shareholders as well, the trial court instructed the jury that
     appellees were not entitled to rely on the business-judgment
     rule unless there appeared to be a predominant corporate
     purpose for their actions, and several reasons for the
     recapitalization plan were given, it was clear that each
     shareholder, not just appellee, was able to benefit from this
     plan; consequently, the trial court did not err in allowing
     reliance on the business-judgment rule.


     Appeal from Union Circuit Court, Second Division; David F.
Guthrie, Judge; affirmed.
     Shackleford, Shackleford & Phillips, P.A., by:  Dennis L.
Shackleford and Jerry Watkins, for appellants.
     Wright, Lindsey & Jennings, by:  Gordon S. Rather, Jr., for
appellees.

     Andree Layton Roaf, Justice.May 28, 1996.   *ADVREP*SC9*








CHARLES L. LONG ET AL.,
                    APPELLANTS,

V.

LESLIE B. LAMPTON AND ERGON,
INC.
                    APPELLEES,






95-774


APPEAL FROM THE UNION COUNTY
CIRCUIT COURT, SECOND DIVISION
NO. CIV-94-3-3,
HON. DAVID F. GUTHRIE, JUDGE,




AFFIRMED.


                       Andree Layton Roaf


     This appeal arises from a minority shareholders' action for
breach of fiduciary duty.  Appellants Charles Long and other
members of the Long family, minority shareholders of Lion Oil
Company ("Lion"), filed an action against appellees Ergon, Inc.
("Ergon"), the largest shareholder of Lion, and Leslie B. Lampton,
president of both Ergon and Lion, alleging breach of fiduciary duty
in the implementation of a corporate recapitalization plan.  The
Longs appeal a jury verdict in favor of Lampton and Ergon.  They
assert that the trial court 1) erred in denying a motion for new
trial on the ground that the verdict was clearly against the
preponderance of the evidence; 2) erroneously instructed the jury
that they had the burden of proving Lampton and Ergon owed them a
duty as a fiduciary; and 3) erroneously instructed the jury that
Lampton and Ergon could rely on the business-judgment rule.  In
their cross-appeal, Lampton and Ergon raise five points to be
addressed only if we reverse on direct appeal.  We find no error
and affirm.
     Charles L. Long and Leslie B. Lampton, as president of Ergon,
were among five investors who came together in 1985 to purchase a
refinery, pipeline, and other related assets located in El Dorado,
Arkansas.  Long is one of four brothers involved in various
business ventures in Union and Miller Counties, including Long
Brothers Oil Company.  Ergon is a family owned corporation headed
by Lampton and based in Jackson, Mississippi.  The new corporation
became known as Lion Oil Company.  It was determined that $24
million was needed to acquire the refinery and sustain its
operation.  The longtime attorney of Charles Long also served as
counsel for Lion and drafted the Pre-Incorporation Agreement. 
Under this agreement, each investor was to obtain a letter of
credit from a financial institution, in the amount of $2 for each
$1 par value subscribed in stock.  Of the 8 million shares of stock
originally issued, Charles Long invested $1.5 million in cash with
a letter of credit from First Commercial Bank ("First Commercial")
in the amount of $3 million; he later transferred some of his stock
to other members of his family.  Ergon invested $4.5 million and
provided a $9 million letter of credit.  Several other investors
were later brought into the corporation;  Ergon ultimately owned
43.3% of the stock and the Longs owned 18.6%.
     Ergon contracted to manage Lion in exchange for a fee of 20%
of the net profits.  This management was overseen by Lion's seven-
member board of directors, which met monthly and received
information concerning all aspects of the refining operation,
including financing needs.  Long served as chairman of the board
from Lion's inception until April 1989.  His attorney also served
on the board, although he held no stock in the company.  
     Because Lion's business of refining oil required periodic
purchases of crude oil in tanker-size lots, Lion needed to have
access to substantial amounts of credit from a commercial lender. 
Lion originally operated under a $60 million line of credit from
General Electric Capital Corporation ("GECC") secured by Lion's
inventory, its receivables, and a pledge of the shareholders letter
of credit.  During the initial four years of operation, the
directors periodically discussed eliminating the shareholders
letters of credit but decided not to do so because of the need for
the additional credit they provided to Lion.
     The events which gave rise to this lawsuit and appeal took
place primarily between February and September 1989.  As the May 1,
1989, expiration date of the financing arrangement with GECC
approached, the board directed Lion's chief financial officer to
locate a more advantageous line of credit.  The board subsequently
selected First National Bank of Boston ("Bank of Boston") to
replace GECC because its credit line was less expensive and more
generous in the valuation it placed on Lion's inventory and
receivables.  Lion's directors, including Long, voted unanimously
on February 28, 1989, to make the change form GECC to Bank of
Boston effective May 1, 1989.
     Although the Bank of Boston did not require Lion to provide
shareholders' letters of credit, it did agree to provide additional
credit per dollar of each shareholder letter of credit offered by
Lion, therefore making available to Lion an additional $16 million
in credit.  The Bank of Boston would not accept transfer of the
GECC letters of credit, but required the issuance of new letters in
its favor or amendments which named it as beneficiary.
     The Longs' initial $3 million letter of credit with First
Commercial had been issued on July 1, 1985.  Although the
preincorporation agreement did not set a time limit for the
shareholders' letters of credit, the banking institutions which
agreed to issue them were told that they would be needed for only
three to five years, or until Lion had established sufficient
credit on its own.  Each shareholders' letter of credit provided
that it could be called in the event the lending institution failed
on or before April 1 of any year to extend or renew it for an
additional year.  Therefore, if First Commercial failed to renew
the Longs' letter of credit by April 1, this would be considered a
default which would allow GECC to demand payment on the letter of
credit.  If the Longs' letter of credit was called by GECC, First
Commercial would in turn demand $3 million from the Longs who could
then look to Lion for repayment.  
     The Longs' letter of credit was renewed for 1988-89 and was
"irrevocable and transferable."  However, because of certain
financial reversals suffered by the Longs, First Commercial advised
them in February 1989, that it would not renew their letter of
credit for 1989-90.  At the March 1989 board meeting, Charles Long
told the other board members, including Lampton, of the bank's
intention not to renew his letter of credit.
     GECC attempted to call the Longs' letter of credit and
demanded payment from First Commercial on April 13, 1989.  Upon
learning of GECC's call on the letter of credit, Long and his
attorney sent correspondence to First Commercial and GECC
threatening litigation unless the demand for payment was withdrawn. 
Lampton learned in a telephone conversation with an officer of
First Commercial on April 13, 1989, that First Commercial would
agree to extend the letter of credit for one more year, however, he
was advised that the letter would be issued as non-transferable. 
GECC withdrew its demand for payment after the letter of credit was
renewed.
     At the annual shareholders meeting on April 27, 1989, Lampton
was elected chairman of the board to replace Charles Long, who had
been chairman since 1985.  Two of Lampton's sons and the son of
another substantial shareholder were elected to replace three other
board members.
     Lampton testified that after learning of the Longs' plight at
the March Board of Directors meeting, several shareholders
complained that it would be unfair for the Longs to maintain the
same amount of stock while withdrawing two-thirds of the capital
they had agreed to provide because they would or could not renew
their letter of credit.  According to Lampton, he was requested by
other shareholders to find a way to address this inequity.  At the
April 27, 1989 board meeting, Lampton provided a draft
recapitalization plan prepared by Lion's attorneys in Mississippi
who had been working on the company's transaction with the Bank of
Boston.  
     The recapitalization plan was approved at a September 1989
shareholders' meeting and granted each shareholder the right to
acquire at $.10 per share, one additional share of stock for each
dollar in letters of credit placed with the Bank of Boston.
According to Lampton, this plan was designed to encourage
shareholders to put up new letters of credit by acquiring more
stock which could be pledged as collateral.  The plan further
provided for the number of shares to be increased from 10 million
to 30 million followed by a reverse stock split to reduce the
number of shares.  Because they were unable to put up letters of
credit and thereby purchase additional shares of stock, the Longs'
1.5 million shares were reduced to 675,000 and their $1.5 million
investment reduced to $675,000.  It is this loss in their
investment which gave rise to the Longs' action against Lampton and
Ergon.
                    1.  Motion for new trial
     The Longs first argue that the trial court erred in denying
their motion for new trial because the verdict was clearly against
the preponderance of the evidence regarding Lampton's breach of his
fiduciary duty.  Lampton, and consequently Ergon, breached their
fiduciary duty, according to the Longs, when Lampton failed to
either timely advise the Longs that First Commercial would not
issue a transferable letter of credit which would have allowed them
the opportunity to request a call of the letter of credit, or to
act within his authority to require First Commercial to issue a
transferable letter of credit.
     On appeal, this court's standard for reviewing the denial of
a motion for new trial is whether there is any substantial evidence
to support the jury verdict. Ray v. Green, 310 Ark. 571,