Opinion ID: 6295
Heading Depth: 2
Heading Rank: 2

Heading: The Nichols Affiliates

Text: Over the years, Nichols prospered and new companies were formed by Turner. The original Nichols shareholders had an oral agreement to share proportionate ownership in any direct affiliates or spin-off companies of Nichols. The relative ownership relationship for the affiliate companies was to be based upon the original ownership ratio of Nichols. The following companies, formed as affiliates, spin-offs, or alleged affiliates of Nichols, form the basis of Conkling's complaint. 1. National Maintenance, International Maintenance, TSMC, BTL, TL, and Crest In 1970, Nichols spun off a corporation to conduct maintenance work previously done in Nichols' name and transferred almost $1,000,000 worth of assets to the newly formed company, named National Maintenance Corporation (National Maintenance). Conkling purchased an 8% interest in National Maintenance in accordance with the relative ownership agreement between the original Nichols founders. Similarly, International Maintenance Corporation (International Maintenance) was formed in 1971, and, although no stock was issued until 1977, Conkling was able to purchase an 8% interest in that company as well. In 1971, TSMC Company (TSMC) was formed as a partnership designed to be supported exclusively by income from rental of construction equipment to Nichols' affiliates on a cost-plus basis. 4 Conkling received an 8% interest in this partnership. T.L. Company (TL) and BTL Company (BTL) were also partnerships whose revenues came from the rental of construction equipment to Nichols and affiliates on a cost-plus basis. Conkling purchased 8% interests in each in 1978 and 1980, respectively. Crest, Inc. (Crest) was formed as a Texas corporation to pursue construction opportunities in that state. Conkling acquired an 8% interest in Crest in August of 1974. 2. TIL In October of 1981, Turner formed Turner Investments, Ltd. (TIL), wholly owned by Turner and his family, to hold his interests in Nichols and another related company. It subsequently became the chief operating company over Nichols and its affiliates, consolidating executive management, data processing, and accounting personnel for these companies. TIL billed Nichols and its affiliates for its services, and Conkling asserted that the billings were excessive. 3. Blast, Trebco, and IPS In August of 1975, Turner formed Blast Corporation (Blast), which subsequently entered the residential construction market under the name S & S Homes, Inc. (S & S). Turner supposedly told Conkling that Blast was a mere shell, and Conkling did not purchase an interest in the company. After sustaining losses, S & S was changed back to Blast, and the company was purchased by Nichols in August of 1977. Trebco Corporation (Trebco) was formed in September of 1983 5 to perform non-union industrial construction and maintenance work in Texas. Conkling claims that Turner concealed Trebco so that he would not be able to purchase an interest in the company. Turner directed Nichols to lend up to $600,000 to Trebco for working capital, but the company was relatively unsuccessful, reporting heavy operating losses. Trebco was subsequently sold to Nichols on October 9, 1984, although the stock certificate effecting the transfer was backdated to November 1, 1983. Nichols also spun off its entire pipe fabrication division and formed International Piping Systems, Ltd. (IPS) in July of 1982. In the process, Nichols also transferred approximately $200,000 worth of assets to the newly-formed company. The stock in IPS was originally issued to TIL, Turner's family-owned company, although Conkling claims he was told it would be issued to Nichols. During the time the IPS stock was owned by TIL, Nichols guaranteed $7,000,000 in bonded indebtedness on behalf of IPS and loaned money to the company. Conkling alleges that, in December of 1983, when he discovered that the IPS stock had been issued to TIL, rather than to Nichols, he brought the ownership issue to Turner's attention, and Turner fired him. All of the stock in IPS was subsequently acquired by Nichols in April of 1984 for the same price as had been paid by TIL. 4. Harmony On the same day Blast was formed, in August of 1979, Turner also formed Harmony Corporation (Harmony). Turner has apparently admitted that he concealed the creation of Harmony from Conkling. 6 The stock in Harmony was issued originally to unrelated parties, but was subsequently acquired by Nichols and then Turner. Conkling learned of Turner's ownership of Harmony and made repeated requests to purchase an interest in the company. Although Turner takes the position that Conkling was never entitled to purchase his relative ownership interest in Harmony, he allowed Conkling to purchase 5,161 shares on March 14, 1980, for $1.00 per share. Conkling understood that this quantity of shares would make him an 8.69565% owner of the company. However, later that day, an additional 33,450 shares of Harmony were issued to Harmony's president, C.N. Bones McLellan, Jr. (McLellan), thus diluting Conkling's interest. McLellan testified that he was told he was to hold the new shares as a nominee for Turner and that they were to be subject to Turner's secret option to purchase. In fact, although McLellan gave a note to Harmony for the purchase price of these shares, the obligation was later cancelled when Turner purchased the shares by executing a note to Harmony in the same amount. 5. Merit, Merit Environmental, and Gymco Merit Industrial Constructors, Inc. (Merit) and its wholly-owned subsidiary, Merit Environmental Services, Inc. (Merit Environmental) were Louisiana corporations created in early 1982 to perform non-union industrial and environmental construction and maintenance work. Merit was a competitor of Harmony's. Although Turner has never been a named owner of Merit, Conkling claims that there is sufficient evidence to show that he secretly owns the company. The undisputed evidence reveals that Turner has supplied 7 Merit with significant cash infusions and has guaranteed loans for the company with Louisiana National Bank (LNB), a bank on whose board of directors Turner sits. Turner has also guaranteed lines of credit and performance bonds on behalf of Merit. Although the owners of record have executed a promissory note in favor of Turner, it appears that no interest has been paid on this note since 1983 and that the principal has only been reduced by payments. After Conkling heard rumors that Turner owned Merit, he requested that he be allowed to purchase his relative ownership interest in the company. Turner denied ownership in Merit, and Conkling never acquired an interest in the company. Conkling also asserts that Turner has used Merit to compete with Harmony, sometimes using Harmony's confidential information to its detriment. Gymco was a Louisiana partnership formed by the owners of Merit to purchase equipment exclusively for rental to Merit. Conkling claims that Turner also secretly owns Gymco, as evidenced by the fact that Turner guaranteed indebtedness of Gymco and reported certain tax effects on his income tax returns with respect to Gymco such as would signify ownership. C. Discussions About Redemption of Conkling's Stock As noted above, Conkling was fired from Nichols in December of 1983, and, not surprisingly, the parties dispute the reason for his termination. After termination, the parties attempted negotiations for the purchase of Conkling's stock in Nichols and its affiliates, 8 but were unable to agree to a price. One year later, Conkling sent a letter to Turner offering to sell these interests for $7,000,000. Although Conkling now claims that he had a binding agreement with Turner to redeem the stock at a fair price, the letter made no reference to any such obligation. Turner never responded to the letter, and this lawsuit followed. D. The Instant Litigation In November 1985, Conkling filed suit against Turner and numerous corporations and partnerships controlled by Turner. He also sued David R. Carpenter (Carpenter), who served as Chief Financial Officer of Nichols and in various other capacities to the Nichols spin-off companies. Conkling alleged civil RICO violations under 18 U.S.C. §§ 1962(c) & (d). He also alleged pendent claims under Louisiana law for breach of fiduciary duty and breach of contract. His primary contention was that he was entitled to own 8.69565% of Nichols, but was defrauded out of the additional .69565% in Nichols by the 1963 agreement. He argues that he was consequently deprived of the additional .69565% interest in several of the Nichols-affiliated companies based upon the application of the Nichols ownership ratio. Conkling also claimed that Turner schemed to prevent Conkling from acquiring any ownership interests in several other, newly-formed companies by misrepresenting or concealing Turner's ownership of these companies. Conkling alleged mail fraud because Turner used numerous mailings to deceive Conkling and securities fraud with respect to certain of the stock transactions. 9 After a protracted discovery, the defendants filed motions to dismiss and for summary judgment. A lengthy joint pre-trial order defining the issues for trial was signed by the judge on October 17, 1991, and filed on October 21, 1991 (the pre-trial order). Prior to trial, by order entered January 21, 1992 (the pre-trial summary judgment), the district court granted the defendants' summary judgment motions in part, dismissing (i) Conkling's RICO predicate act based upon Turner's alleged refusal to redeem his stock in Nichols and affiliates, (ii) certain derivative claims, (iii) Conkling's claims for wrongful discharge, denial of access to corporate records, and damages due to the corporations' use of an unfavorable depreciation method, (iv) all claims against Carpenter, and (v) certain miscellaneous claims not discussed in this appeal. In response to requests from both parties, the district court clarified the pre-trial summary judgment by order of February 5, 1992 (the clarification order), to confirm that it had dismissed all claims which are shareholder derivative claims in nature, including any claim involving Harmony to the extent that such claim is derivative. The weekend before trial, the district court announced that it would sever the issues to be tried and would try only a single alleged predicate act—fraud in the 1963 agreement—with respect to Conkling's civil RICO claims in the first phase of trial. The court also stated that the breach of contract claim would be tried in this initial phase. After Conkling presented his case, both parties moved for judgment as a matter of law; the district court 10 granted the defendants' motion with respect to Conkling's breach of contract claims. The 1963 agreement issue was submitted to the jury, which found that Turner did not commit fraud in the 1963 agreement. As a result of the jury's verdict on this issue, the district court, on April 9, 1992, entered summary judgment in favor of the defendants on the remainder of Conkling's complaint, both under civil RICO and breach of fiduciary duty (the post-trial summary judgment). The instant appeal ensued.