Herring Bancorp, Inc. C.C. Burgess And C. Campbell Burgess v. John Mikkelsen, Acting Solely in His Capacity as Trustee of the John Mikkelsen Trust
This text of Herring Bancorp, Inc. C.C. Burgess And C. Campbell Burgess v. John Mikkelsen, Acting Solely in His Capacity as Trustee of the John Mikkelsen Trust (Herring Bancorp, Inc. C.C. Burgess And C. Campbell Burgess v. John Mikkelsen, Acting Solely in His Capacity as Trustee of the John Mikkelsen Trust) is published on Counsel Stack Legal Research, covering Court of Criminal Appeals of Texas primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
ACCEPTED 07-15-00327-CV SEVENTH COURT OF APPEALS AMARILLO, TEXAS 11/20/2015 4:55:24 PM Vivian Long, Clerk
No. 07-15-00327-CV
FILED IN IN THE COURT OF APPEALS FOR THE 7th COURT OF APPEALS AMARILLO, TEXAS SEVENTH DISTRICT OF TEXAS AT AMARILLO 11/20/2015 4:55:24 PM VIVIAN LONG CLERK HERRING BANCORP, INC.; C.C. BURGESS; and C. CAMPBELL BURGESS,
Appellants/Cross-Appellees,
v.
JOHN MIKKELSEN, acting solely in his capacity as Trustee of the John Mikkelsen Trust,
Appellee/Cross-Appellant.
On Appeal from the 46th Judicial District Court Wilbarger County, Texas, Trial Court Cause No. 24,955 Honorable Dan Mike Bird, Presiding
BRIEF OF CROSS-APPELLANT
Lee F. Christie State Bar No. 042317100 lfchristie@popehardwicke.com Michael L. Atchley State Bar No. 01397600 matchley@popehardwicke.com POPE, HARDWICKE, CHRISTIE, SCHELL, KELLY & RAY, L.L.P. 500 W. 7th Street, Suite 600 Fort Worth, Texas 76102 817.332.3245—Telephone 817.877.4781—Telecopier
ORAL ARGUMENT REQUESTED IDENTITY OF PARTIES AND COUNSEL
Cross-Appellant/Appellee/Plaintiff:
John Mikkelsen, acting solely in his capacity as Trustee of the John Mikkelsen Trust
Counsel for Cross-Appellant/Appellee/Plaintiff:
Lee F. Christie State Bar No. 042317100 lfchristie@popehardwicke.com Michael L. Atchley State Bar No. 01397600 matchley@popehardwicke.com POPE, HARDWICKE, CHRISTIE, SCHELL, KELLY & RAY, L.L.P. 500 W. 7th Street, Suite 600 Fort Worth, Texas 76102 817.332.3245—Telephone 817.877.4781—Telecopier Trial and Appellate Counsel
Brief of Cross-Appellant Page i IDENTITY OF PARTIES AND COUNSEL (cont.)
Appellants/Cross-Appellees/Defendants:
Herring Bancorp, Inc. C.C. Burgess C. Campbell Burgess
Counsel for Appellants/Cross- Appellees/Defendants: Cornell D. Curtis Thomas S. Leatherbury State Bar No. 24007069 State Bar No. 12095275 vernonlaw@sbcglobal.net tleatherbury@velaw.com CORNELL D. CURTIS, P.C. Manuel G. Berrelez 1716 Main Street State Bar No. 24057760 Vernon, Texas 76834 mberrelez@velaw.com 940.552.9100—Telephone Stephen S. Gilstrap 940.552.2655—Telecopier State Bar No. 24078563 Trial and Appellate Counsel sgilstrap@velaw.com VINSON & ELKINS, LLP Tim Newsom 2001 Ross Avenue, Suite 3700 State Bar No. 00784677 Dallas, Texas 75201 tim@lovell-law.net 214.220.7700—Telephone John H. Lovell 214.999.7792—Telecopier State Bar No. 12609300 Appellate Counsel john@lovell-law.net LOVELL, LOVELL, NEWSOM & ISERN, L.L.P. 112 West 8th Avenue, Suite 1000 Amarillo, Texas 79101-2314 806.373.1515—Telephone 806.379.7176—Telecopier Trial Counsel
Brief of Cross-Appellant Page ii TABLE OF CONTENTS
Page
IDENTITY OF PARTIES AND COUNSEL ..........................................................i
INDEX OF AUTHORITIES ................................................................................... v
STATEMENT OF THE CASE ............................................................................. vii
STATEMENT REGARDING ORAL ARGUMENT ........................................ viii
TABLE OF ABBREVIATIONS ............................................................................ ix
ISSUES PRESENTED ..............................................................................................x
STATEMENT OF FACTS ....................................................................................... 1
SUMMARY OF THE ARGUMENT .................................................................... 19
ARGUMENT AND AUTHORITIES .................................................................. 20
ISSUE 1: The trial court excluded Mikkelsen’s evidence of Appellants’ noncompliance with regulatory requirements and failure to inform the Internal Revenue Service and regulators that the supposed Subchapter “S” conversion was compromised as two classes of stock continue to exist. Was this error? ......................................................... 20
ISSUE 2: The trial court denied Mikkelsen’s Motion to Compel the discovery of net worth information. Was this error? ........................................................................ 24
CONCLUSION ...................................................................................................... 26
PRAYER .................................................................................................................. 27
Brief of Cross-Appellant Page iii SIGNATURE OF COUNSEL ............................................................................... 28
CERTIFICATE OF COMPLIANCE .................................................................... 29
CERTIFICATE OF SERVICE ............................................................................... 29
INDEX TO APPENDIX TO BRIEF OF CROSS-APPELLANT ....................... 30
Brief of Cross-Appellant Page iv INDEX OF AUTHORITIES
Cases Page
Alamo Nat’l Bank v. Kraus, 616 S.W.2d 908 (Tex. 1981)................................................................. 22, 26
BMW of N. Am. v. Gore, 517 U.S. 559, 116 S.Ct. 1589, 134 L.Ed.2d 809 (1996) ............................ 22
Ford Motor Co. v. Castillo, 279 S.W.3d 656 (Tex. 2009)....................................................................... 25
Gharda USA, Inc. v. Control Solutions, Inc., 464 S.W.3d 338 (Tex. 2015)....................................................................... 21
In re Arpin America Moving Systems, LLC, 416 S.W.3d 927 (Tex. App.―Dallas 2013, orig. proceeding) ............... 25
In re Jacobs, 300 S.W.3d 35 (Tex. App.―Houston [14th Dist.] 2009, orig. proceeding) .................. 25
Lunsford v. Morris, 746 S.W.2d 471 (Tex. 1988)....................................................................... 25
McElroy v. Fitts, 876 S.W.2d 190 (Tex. App.―El Paso 1994, writ dism’d) ...................... 27
State v. Central Expressway Sign Assocs., 302 S.W.3d 866 (Tex. 2009)....................................................................... 21
State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 123 S.Ct. 1513, 155 L.Ed.2d 585 (2003) ............................ 22
Tex. Mut. Ins. Co. Navarez, 312 S.W.3d 94 (Tex. App.―Dallas 2010, pet. denied) .......................... 25
Brief of Cross-Appellant Page v Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299 (Tex. 2006)....................................................................... 22
Vernon v. Perrien, 390 S.W.3d 47 (Tex. App.―El Paso 2012, pet. denied) ......................... 23
Rules and Statutes
Tex. Civ. Prac. & Rem.
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ACCEPTED 07-15-00327-CV SEVENTH COURT OF APPEALS AMARILLO, TEXAS 11/20/2015 4:55:24 PM Vivian Long, Clerk
No. 07-15-00327-CV
FILED IN IN THE COURT OF APPEALS FOR THE 7th COURT OF APPEALS AMARILLO, TEXAS SEVENTH DISTRICT OF TEXAS AT AMARILLO 11/20/2015 4:55:24 PM VIVIAN LONG CLERK HERRING BANCORP, INC.; C.C. BURGESS; and C. CAMPBELL BURGESS,
Appellants/Cross-Appellees,
v.
JOHN MIKKELSEN, acting solely in his capacity as Trustee of the John Mikkelsen Trust,
Appellee/Cross-Appellant.
On Appeal from the 46th Judicial District Court Wilbarger County, Texas, Trial Court Cause No. 24,955 Honorable Dan Mike Bird, Presiding
BRIEF OF CROSS-APPELLANT
Lee F. Christie State Bar No. 042317100 lfchristie@popehardwicke.com Michael L. Atchley State Bar No. 01397600 matchley@popehardwicke.com POPE, HARDWICKE, CHRISTIE, SCHELL, KELLY & RAY, L.L.P. 500 W. 7th Street, Suite 600 Fort Worth, Texas 76102 817.332.3245—Telephone 817.877.4781—Telecopier
ORAL ARGUMENT REQUESTED IDENTITY OF PARTIES AND COUNSEL
Cross-Appellant/Appellee/Plaintiff:
John Mikkelsen, acting solely in his capacity as Trustee of the John Mikkelsen Trust
Counsel for Cross-Appellant/Appellee/Plaintiff:
Lee F. Christie State Bar No. 042317100 lfchristie@popehardwicke.com Michael L. Atchley State Bar No. 01397600 matchley@popehardwicke.com POPE, HARDWICKE, CHRISTIE, SCHELL, KELLY & RAY, L.L.P. 500 W. 7th Street, Suite 600 Fort Worth, Texas 76102 817.332.3245—Telephone 817.877.4781—Telecopier Trial and Appellate Counsel
Brief of Cross-Appellant Page i IDENTITY OF PARTIES AND COUNSEL (cont.)
Appellants/Cross-Appellees/Defendants:
Herring Bancorp, Inc. C.C. Burgess C. Campbell Burgess
Counsel for Appellants/Cross- Appellees/Defendants: Cornell D. Curtis Thomas S. Leatherbury State Bar No. 24007069 State Bar No. 12095275 vernonlaw@sbcglobal.net tleatherbury@velaw.com CORNELL D. CURTIS, P.C. Manuel G. Berrelez 1716 Main Street State Bar No. 24057760 Vernon, Texas 76834 mberrelez@velaw.com 940.552.9100—Telephone Stephen S. Gilstrap 940.552.2655—Telecopier State Bar No. 24078563 Trial and Appellate Counsel sgilstrap@velaw.com VINSON & ELKINS, LLP Tim Newsom 2001 Ross Avenue, Suite 3700 State Bar No. 00784677 Dallas, Texas 75201 tim@lovell-law.net 214.220.7700—Telephone John H. Lovell 214.999.7792—Telecopier State Bar No. 12609300 Appellate Counsel john@lovell-law.net LOVELL, LOVELL, NEWSOM & ISERN, L.L.P. 112 West 8th Avenue, Suite 1000 Amarillo, Texas 79101-2314 806.373.1515—Telephone 806.379.7176—Telecopier Trial Counsel
Brief of Cross-Appellant Page ii TABLE OF CONTENTS
Page
IDENTITY OF PARTIES AND COUNSEL ..........................................................i
INDEX OF AUTHORITIES ................................................................................... v
STATEMENT OF THE CASE ............................................................................. vii
STATEMENT REGARDING ORAL ARGUMENT ........................................ viii
TABLE OF ABBREVIATIONS ............................................................................ ix
ISSUES PRESENTED ..............................................................................................x
STATEMENT OF FACTS ....................................................................................... 1
SUMMARY OF THE ARGUMENT .................................................................... 19
ARGUMENT AND AUTHORITIES .................................................................. 20
ISSUE 1: The trial court excluded Mikkelsen’s evidence of Appellants’ noncompliance with regulatory requirements and failure to inform the Internal Revenue Service and regulators that the supposed Subchapter “S” conversion was compromised as two classes of stock continue to exist. Was this error? ......................................................... 20
ISSUE 2: The trial court denied Mikkelsen’s Motion to Compel the discovery of net worth information. Was this error? ........................................................................ 24
CONCLUSION ...................................................................................................... 26
PRAYER .................................................................................................................. 27
Brief of Cross-Appellant Page iii SIGNATURE OF COUNSEL ............................................................................... 28
CERTIFICATE OF COMPLIANCE .................................................................... 29
CERTIFICATE OF SERVICE ............................................................................... 29
INDEX TO APPENDIX TO BRIEF OF CROSS-APPELLANT ....................... 30
Brief of Cross-Appellant Page iv INDEX OF AUTHORITIES
Cases Page
Alamo Nat’l Bank v. Kraus, 616 S.W.2d 908 (Tex. 1981)................................................................. 22, 26
BMW of N. Am. v. Gore, 517 U.S. 559, 116 S.Ct. 1589, 134 L.Ed.2d 809 (1996) ............................ 22
Ford Motor Co. v. Castillo, 279 S.W.3d 656 (Tex. 2009)....................................................................... 25
Gharda USA, Inc. v. Control Solutions, Inc., 464 S.W.3d 338 (Tex. 2015)....................................................................... 21
In re Arpin America Moving Systems, LLC, 416 S.W.3d 927 (Tex. App.―Dallas 2013, orig. proceeding) ............... 25
In re Jacobs, 300 S.W.3d 35 (Tex. App.―Houston [14th Dist.] 2009, orig. proceeding) .................. 25
Lunsford v. Morris, 746 S.W.2d 471 (Tex. 1988)....................................................................... 25
McElroy v. Fitts, 876 S.W.2d 190 (Tex. App.―El Paso 1994, writ dism’d) ...................... 27
State v. Central Expressway Sign Assocs., 302 S.W.3d 866 (Tex. 2009)....................................................................... 21
State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 123 S.Ct. 1513, 155 L.Ed.2d 585 (2003) ............................ 22
Tex. Mut. Ins. Co. Navarez, 312 S.W.3d 94 (Tex. App.―Dallas 2010, pet. denied) .......................... 25
Brief of Cross-Appellant Page v Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299 (Tex. 2006)....................................................................... 22
Vernon v. Perrien, 390 S.W.3d 47 (Tex. App.―El Paso 2012, pet. denied) ......................... 23
Rules and Statutes
Tex. Civ. Prac. & Rem. Code § 41.011 .............................................................. 22
Tex. R. App. P. 9.4 ............................................................................................... 29
Tex. R. App. P. 39 ...............................................................................................viii
Brief of Cross-Appellant Page vi STATEMENT OF THE CASE
Nature of the Case: This is an appeal following a jury trial. Plaintiff/Cross-Appellant Mikkelsen filed suit contending that Appellants’ invalid stock redemption constituted a breach of Herring’s Articles of Incorporation and therefore a breach of contract. Mikkelsen also brought claims for declaratory judgment, enforcement of inspection rights, breach of fiduciary duty, civil conspiracy, and unlawful oppression of a minority shareholder. [1 CR 5-17; 2 CR 153-161] [App. 45-57; 58-66]
Trial Court: The 46th Judicial District Court, Wilbarger County, Texas, Cause No. 24,955; the Honorable Dan Mike Bird, presiding.
Trial Court’s Disposition: The trial court entered a Final Judgment on June 16, 2015 incorporating a prior partial summary judgment as well as the jury’s verdict [2 CR 334; App. 1]. The trial court denied Appellants’ Motion for Judgment Notwithstanding the Verdict and Motion for New Trial on August 19, 2015. [2 CR 409- 410].
Brief of Cross-Appellant Page vii STATEMENT REGARDING ORAL ARGUMENT
Pursuant to Texas Rule of Appellate Procedure 39, Cross-Appellant
Mikkelsen requests oral argument. This Court’s decision will be
significantly aided by oral argument because the appeal involves a
somewhat complex set of facts and procedural history.
Brief of Cross-Appellant Page viii TABLE OF ABBREVIATIONS
Mikkelsen: Appellee/Cross-Appellant/Plaintiff John Mikkelsen
Herring: Appellant/Cross-Appellee/Defendant Herring Bancorp, Inc.
CR: Clerk’s Record
RR: Reporter’s Record
App: Appendix
Brief of Cross-Appellant Page ix ISSUES PRESENTED
ISSUE 1: The trial court excluded Mikkelsen’s evidence of Appellants’
noncompliance with regulatory requirements and failure to
inform the Internal Revenue Service and regulators that the
supposed Subchapter “S” conversion was compromised as two
classes of stock continue to exist. Was this error?
ISSUE 2: The trial court denied Mikkelsen’s Motion to Compel the
discovery of net worth information. Was this error?
Brief of Cross-Appellant Page x STATEMENT OF FACTS
This case involves the purported redemption of shares of
Herring’s preferred stock. Herring is a bank holding company that
owns Herring Bank. Mikkelsen was previously Chairman of the Board
of Directors for Herring and the Bank, but he was ousted from these
roles in the 1990s when the Burgess family took control of both.
Mikkelsen later inherited some shares of Herring preferred stock from
his mother and was later assigned preferred shares by his brother
Mallory Mikkelsen.
When the Burgess family decided to convert Herring to a
Subchapter “S” corporation ― meaning that it could no longer have
preferred stock ― they concocted a scheme to permit all of the
preferred shareholders except Mikkelsen (that is, the Burgess family
and their friends) to trade their preferred stock for common stock.
Mikkelsen alone was commanded to sell his preferred shares back to
Herring for par value. Mikkelsen’s suit centers on his contention that
this unequal treatment of the preferred shares (permitting the
exchange of some but then “redeeming” Mikkelsen’s) violated the
company’s Articles of Incorporation and was void.
Brief of Cross-Appellant Page 1 Mikkelsen, as Trustee of the John Mikkelsen Trust, owns 300
shares of preferred stock in Herring.1 His chief complaint in this case is
that Herring violated its Articles of Incorporation because it permitted
all of Herring’s preferred stock except his to be exchanged for common
stock, and that his shares were singled out for “redemption,” meaning
that he was commanded to sell them back to the company for par
value. Mikkelsen filed this suit in the trial court, making claims for (1)
breach of contract, for violating the Articles of Incorporation, (2) a
declaratory judgment that the redemption was void and that
Mikkelsen continues to be a preferred shareholder, (3) a declaratory
judgment that Mikkelsen has the right to inspect the company’s books
and records, and (4) breach of fiduciary duty, oppression of a minority
shareholder, and conspiracy, as Mikkelsen contends that the
redemption scheme was the work of the Burgess family aimed at
singling him out and divesting him of any interest in Herring.
Mikkelsen’s involvement with Herring Bank began in 1969,
when he was elected to its Board of Directors.2 Mikkelsen’s
1 8 RR 47-48. 2 8 RR 21.
Brief of Cross-Appellant Page 2 grandfather-in-law was involved with the Bank when it was chartered
in 1903.3 Mikkelsen became Vice-Chairman of the Board in 1978, and
was elected Chairman of the Board in 1982.4 Herring Bancorp ― the
holding company that is a party to this case ― was formed in 1984.5
Herring Bancorp owns Herring Bank.6 Mikkelsen served as Chairman
of the Board of the Bank from 1982 until 1997, and served as Chairman
of the Board of Herring Bancorp from the time it was formed in 1984
until 1992.7
Appellant C.C. Burgess bought stock in Herring Bank in about
1972, and was elected to the Board of Directors in about 1973.8 C.C.
Burgess continues to serve on Herring Bancorp’s Board of Directors as
its Chairman.9 He is also Chairman of the Board of Directors of the
Bank.10
3 8 RR 18-19. 4 8 RR 22. 5 8 RR 23. 6 9 RR 16. 7 8 RR 27-28. 8 8 RR 27. 9 Id.; 9 RR 16 10 9 RR 16-17.
Brief of Cross-Appellant Page 3 Campbell Burgess is the son of C.C. Burgess.11 He has served as
Chief Executive Officer and Vice-Chairman of Herring Bancorp.12 He
has also served as Vice-Chairman of the Bank.13
C.C. Burgess gained an executive capacity with Herring in the
1990s, when the Burgess family acquired additional stock in the
company and took control of it.14 From that time forward, the Burgess
family, or trusts created for their benefit, have owned and controlled a
majority of Herring’s stock, and they have been in control of the Bank
and the holding company for all of that time.15 Members of the
Burgess family now comprise the entire Herring Board of Directors,
except for one seat, which is held by a long-time friend of Campbell
Burgess.16
When the Burgess family took control of the Bank in 1992, they
elected themselves to enough positions to take over the Board of
Directors, and they decided to oust Mikkelsen from his leadership
11 9 RR 95-96. 12 9 RR 17. 13 Id. 14 9 RR 18. 15 9 RR 18, 21. 16 9 RR 21, 75-76.
Brief of Cross-Appellant Page 4 role.17 One of the other shareholders, along with the local County
Attorney, brought a quo warranto proceeding, contending in essence
that the Burgesses had not been properly elected to their positions.18
That litigation was resolved in June or July 1992, by an agreement
under which, among other things, Mikkelsen and his family sold
essentially all of their shares in the holding company (all except for 180
shares, which were sold back to the company in 1998), and Mikkelsen
was provided a five-year contract to stay on as Chairman and Chief
Executive Officer until December 31, 1997.19 After this, Mikkelsen was
out of the Bank and the Burgesses were in complete control.20
The only Mikkelsen to retain any interest in the company after
that time was Mikkelsen’s mother, who had 300 shares of Herring’s
preferred stock (i.e., stock that has a specific par value and earns a
certain percentage dividend, but has no voting rights).21 There were
about 17,000 total shares of Herring preferred stock outstanding.22
17 8 RR 36-37; 9 RR 20-21. 18 8 RR 34-35. 19 8 RR 35-36. 20 8 RR 36-37. 21 8 RR 37. 22 Id.
Brief of Cross-Appellant Page 5 Mikkelsen’s mother died in 2005, at which time Mikkelsen (as
Trustee of the John Mikkelsen Trust) inherited 150 of the preferred
shares and his brother Mallory inherited the other 150 shares.23
Mallory later assigned his 150 shares to Mikkelsen (as Trustee of the
John Mikkelsen Trust).24
The Burgesses decided in 2006 to convert Herring from a
Subchapter “C” corporation to a Subchapter “S” corporation.25 This
was allegedly desired mainly to take advantage of the fact that
Subchapter “S” corporations are not taxed at the corporate level as
Subchapter “C” corporations are. Rather, Subchapter “S” corporations
are taxed more like partnerships; dividends are paid to the
shareholders, who pay taxes on that income, but the company itself is
not generally subject to income taxation.26 Mikkelsen initially
expressed to C.C. Burgess that he was not opposed to the conversion.27
23 8 RR 46-47. 24 8 RR 48-49. 25 8 RR 55-56, 59; 10 RR 88-89. 26 8 RR 56. 27 8 RR 59-60.
Brief of Cross-Appellant Page 6 To convert a corporation from Subchapter “C” to Subchapter
“S,” the company needs the consent of all shareholders,28 must
maintain no more than one class of stock,29 and must have no more
than 100 shareholders.30 As the company had preferred shares
outstanding, Herring would have to redeem those shares or convert
them to common stock.31
Herring’s preferred stock had been issued under specific
authority in the company’s Articles of Incorporation. The Articles also
set forth a specific, required procedure for redeeming the shares:
5. Redemption. a. Preferred Stock. The Corporation, at the option of the Board of Directors, may at any time redeem the whole, or from time to time redeem any part, of the Preferred Stock outstanding by paying in cash therefor the sum of $95 per share, plus all dividends declared but unpaid thereon . . . . *** Should only a part of the outstanding Preferred Stock be redeemed, the redemption will be effected by lot or pro rata, as prescribed by the Board of Directors.32
28 10 RR 110-111. 29 8 RR 61; 9 RR 25. 30 9 RR 29-30. 31 8 RR 61. 32 12 RR PX-2 (App. 84) (emphasis added).
Brief of Cross-Appellant Page 7 The Articles of Incorporation are clear on this: if the company
wishes to redeem any preferred shares, it must either (1) redeem all of
them, (2) redeem some by lot [drawing], or (3) redeem some of them
by redeeming pro rata from each shareholder.33
Instead of following the Articles, the Burgesses decided on a
different scheme that resulted in bracketing and forcing out only the
Mikkelsen shares. C.C. Burgess and one other Board member labeled
themselves a two-person “committee” that concocted “criteria” for
permitting a preferred shareholder to “convert” their shares for
common stock in the company rather than to have the shares
redeemed.
In essence, the Burgess “committee” decided that a preferred
shareholder would be entitled to convert preferred shares to common
stock if (1) the preferred shareholder had a banking relationship with
Herring Bank, and (2) upon conversion, the shareholder would hold at
least 50 shares of common stock; any other preferred shares (i.e.,
33 8 RR 93.
Brief of Cross-Appellant Page 8 Mikkelsen’s) would be redeemed.34 There is no authority in the
Articles of Incorporation for such a set of “criteria” to determine which
preferred shares to redeem, and there is no authority in the Articles for
an “exchange” or “conversion” of preferred shares.
At the time this conversion scheme was created, there were 11
preferred shareholders, who together held a collective 17,147 preferred
shares.35 Those shareholders were (1) C.C. Burgess – 7882 shares ; (2)
Janie Slemp Burgess (C.C. Burgess’s wife36) – 576 shares; (3) Margo
Colquitt Burgess (C.C. Burgess’s former daughter-in-law37) – 1053
shares; (4) Harriet Burgess Myers (C.C. Burgess’s sister38) – 660 shares;
(5) Monarch Trust Co. (a trust company owned by the Burgess
family39) – 96 shares; (6) Kelly & Susan Couch Living Trust (Susan
Couch was a board member40) – 2940 shares; (7) Sharon Haney
Browning (cousin of board member Couch41) – 1470 shares; (8) Susan
34 8 RR 192; 9 RR 96-97. 35 9 RR 100-104; 12 RR PX-25 (App. 93). 36 8 RR 31; 9 RR 100. 37 9 RR 101. 38 9 RR 101. 39 9 RR 100. 40 9 RR 101. 41 9 RR 100-101.
Brief of Cross-Appellant Page 9 Spiller Culbertson (relative of board member Couch42) – 1470 shares;
(9) Vernon Parts, Inc. (a company owned by Jim Pennington43) – 1000
shares; (10) Mikkelsen – 150 shares; (11) Mallory Mikkelsen – 150
shares.44
As the preferred shares had a set par value of $95 per share,
Herring would have had to pay over $1,600,000.00 to redeem all 17,147
preferred shares ($95 x 17,147).45 The company obviously wished to
avoid such an expenditure, which is undoubtedly part of the reason
the Burgesses concocted the conversion scheme.
To convert the preferred shares to common stock, the company
calculated an exchange value based on the par value of the preferred
shares ($95 per share) and the book value of the common stock.46 The
book value of the common stock at that time was $698.10,47 meaning
that the conversion rate was about 7.34 preferred shares for one share
of common stock (698.10 / 95).48
42 9 RR 101. 43 9 RR 203. 44 12 RR PX-25 (App. 93). 45 9 RR 61. 46 9 RR 30-31. 47 10 RR 153. 48 Id.; 13 RR DX- 12 (App. 94).
Brief of Cross-Appellant Page 10 The conversion rate resulted in a calculation that the preferred
shareholders, if they converted to common stock, would receive these
numbers of common shares: (1) C.C. Burgess - 1072 shares; (2) Janie
Slemp Burgess – 78 shares; (3) Margo Colquitt Burgess – 143 shares; (4)
Harriet Burgess Myers – 89 shares; (5) Monarch Trust Co. – 13 shares;
(6) Kelly & Susan Couch Living Trust – 400 shares; (7) Sharon Haney
Browning – 200 shares; (8) Susan Spiller Culbertson– 200 shares; (9)
Vernon Parts, Inc. – 136 shares; (10) Mikkelsen – 20 shares; (11)
Mallory Mikkelsen – 20 shares.49
C.C. Burgess’s “criteria” for permitting conversion ― specifically,
the criterion denying conversion for anyone who would not have at
least 50 shares of common stock ― cut out only the Mikkelsen shares.
Monarch Trust Co. (the Burgess family company) already had other
shares of common stock, so it would have over 400 total shares after
conversion.50 Corporations cannot own stock in a Subchapter “S”
corporation, but the company assisted Monarch, and Vernon Parts,
49 10 RR 153; 13 RR DX- 12 (App. 94). 50 9 RR 53.
Brief of Cross-Appellant Page 11 Inc., to change the ownership of their shares so that they could then be
converted to common stock.51
The Burgesses offered no similar assistance to Mikkelsen. Rather,
the 50-share criterion cut only the Mikkelsens out of the chance to
convert to common stock (as they would have had about 40 shares
instead of the concocted 50-share requirement). There was no
legitimate reason for the 50-share requirement; C.C. Burgess testified
that it was just a number he and the other member of his two-person
“committee” invented.52 Though Board committees were required by
the company’s Bylaws to keep minutes, this “committee” kept no
minutes.53
Obviously, the Burgesses wanted to rid themselves of
Mikkelsen. He was the person they had already forced out of the Bank
once, and they did not want him involved any longer. Even though he
had expressed general initial agreement with the conversion to
Subchapter “S” status, they were concerned that he might ultimately
51 9 RR 203. 52 9 RR 57. 53 9 RR 49-50.
Brief of Cross-Appellant Page 12 oppose the idea, thus depriving the Burgesses of the unanimity
required for conversion.54
The only stated reason the Burgesses had for implementing any
criteria is that they wanted to limit the number of stockholders so that
they would not ultimately run afoul of the maximum of 100
shareholders.55 But the company would have had far fewer than 100
shareholders, and with the generational exception (under which lineal
relatives generally do not count against the 100-shareholder limit), the
company was nowhere close to the maximum number.56 There is no
evidence supporting the notion that ridding the company of
Mikkelsen and only Mikkelsen would translate to any significant
difference vis-à-vis the 100-shareholder maximum.
C.C. Burgess initially told Mikkelsen that all preferred shares
would be redeemed and/or exchanged into common stock.57
However, on September 22, 2006, Burgess sent Mikkelsen a letter
informing him that “[s]ince the conversion factor [for preferred and
non-voting common shares] will result in you and Mallory having 54 10 RR 110. 55 9 RR 27. 56 9 RR 30; 8 RR 77-78. 57 8 RR 61.
Brief of Cross-Appellant Page 13 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.”58 As this letter reflects, Mikkelsen and his brother were being
singled out for “special” treatment in the form of deprivation of their
preferred shares.
Although the other preferred shareholders were given the
opportunity to convert their shares to common stock,59 the Mikkelsens
were sent a “Notice of Redemption” informing them that their shares
would be redeemed:
This letter is to notify you that the board of directors (the “Board”) of Herring Bancorp, Inc. (the “Company”) has called for the redemption (the “Redemption”) of your outstanding shares of Preferred Stock (the “Preferred Stock”) of the Company on November 20, 2006. *** As a result of this process, the Board appointed a committee to recommend the criteria for determining which Preferred Stock shareholders would be offered to exchange their shares for the Company’s common stock (the “Common Stock”), the nonvoting Common Stock-Series A (the “Common Stock- Series A”), or to have their shares redeemed. The Board’s criteria for making this
58 8 RR 69; 12 RR PX- 9. 59 12 RR PX-18.
Brief of Cross-Appellant Page 14 determination included whether the Preferred Stock shareholder had a banking relationship with Herring Bank (the “Bank”), and whether they would own at least 50 shares of Common Stock upon the conversion. If these criteria were met, the Board offered the Preferred Stock shareholders the option to exchange their shares for the Common Stock. If the Preferred Stock shareholder did not meet these criteria, the Board determined the Preferred Stock shareholders would be redeemed. *** From our conversations with you and the Board’s determination regarding our classes of stock, your Preferred Stock will be redeemed.60
Clearly, Defendants’ own “Notice of Redemption” draws a
distinction among the preferred shareholders and admits that only
some of the preferred shares were being redeemed for cash. The
Notice of Redemption also makes it clear that the procedure for
determining which of the preferred shares would be redeemed for
cash did not involve a drawing by lot or pro rata as mandated by the
Articles; instead, all but the Mikkelsen shares were “exchanged” for
common stock.
Mikkelsen did not surrender the 300 shares as demanded, but
instead pleaded with Burgess and Herring’s attorneys to permit him to
60 12 RR PX-13 (App. 90); 8 RR 80-81.
Brief of Cross-Appellant Page 15 convert the preferred shares to common stock, and reminded them
that the partial redemption violated the Articles of Incorporation.61
Mikkelsen’s requests were ignored, so he filed the underlying lawsuit
in 2008.62
Procedural History
In the court below, Mikkelsen asserted claims for (1) breach of
contract, (2) a declaration that the redemption was void and that he
continues to hold 300 shares of Herring’s preferred stock, (3) a
declaration that he has the right to inspect the company’s books and
records, and (4) breach of fiduciary duty, unlawful oppression of a
minority shareholder, and conspiracy.63
Well before the case went to jury trial, the trial court granted a
partial summary judgment in favor of Mikkelsen on his breach of
contract claim and declaratory judgment claims.64 Specifically, the
trial court found and concluded as a matter of law that (1) the
purported redemption of Mikkelsen’s preferred shares was
undertaken in violation of the company’s Articles of Incorporation and 61 8 RR 76; 8 RR 116-127. 62 8 RR 127. 63 1 CR 5-17 (App. 45-57); 2 CR 153-161 (App. 58-66). 64 1 CR 306-307 (App. 4-5).
Brief of Cross-Appellant Page 16 is void, and (2) Mikkelsen is, and continues to be, the holder of 300
shares of Herring’s preferred stock, and has all the rights appurtenant
thereto, including the right to inspect the company’s books and
records.65
During the trial, the trial court did not permit Mikkelsen to
introduce evidence of regulatory difficulties concerning the Burgesses
and the Office of the Comptroller of the Currency and the FDIC.66
Specifically, by way of an offer of proof, Mikkelsen offered evidence
that an order such as the trial court’s order granting Mikkelsen’s
Motion for Partial Summary Judgment invokes a duty on the part of
the Bank’s management to disclose the order to the IRS and
regulators.67 There was no such disclosure, and no disclosure on
Herring’s FDIC call reports.68 Additionally, Mikkelsen offered
evidence of Herring’s failure to comply with requirements of the
Office of the Comptroller of the Currency (the regulatory authority
governing national banks), that the bank surrendered its OCC charter
65 Id. 66 6 RR 10-14; 8 RR 142-144. 67 8 RR 220-221 68 8 RR 221-246; 12 RR PX-45, 46, 47, 52, 53 (App. 95-115), 54 (App. 116-141); 13 RR
DX-31, 41-46.
Brief of Cross-Appellant Page 17 and became a state bank, and that the FDIC essentially ordered
Campbell Burgess to cease his leadership role with the Bank.69 The
trial court refused to admit this evidence, even though Mikkelsen
urged that the evidence was critical in showing a pattern of improper
conduct.
The trial court also prevented Mikkelsen from introducing
evidence as to the net worth of the Appellants, and in fact precluded
Mikkelsen from being able to conduct discovery of the Appellants’ net
worth.70
At the conclusion of the trial, the jury found that Mikkelsen was
entitled to recover attorney’s fees in the amount of $127,442.00 through
trial, with additional amounts for appeals; found that C.C. Burgess
engaged in oppressive conduct toward Mikkelsen; found that
Campbell Burgess engaged in oppressive conduct toward Mikkelsen;
found that Mikkelsen was entitled to recover damages in the amount
of $23,314.80 for lost dividend income; found that C.C. Burgess did not
act with malice; found that Campbell Burgess did not act with malice;
69 8 RR 237-238; 12 RR PX-53-54 (App. 105-115; 116-141); 10 RR 216-232. 70 1st Supp CR 86-93 (App. 37-43; 44).
Brief of Cross-Appellant Page 18 did not find any exemplary damages; found that C.C. Burgess
breached fiduciary duties owed to Mikkelsen; found that Campbell
Burgess did not breach fiduciary duties owed to Mikkelsen; and found
no conspiracy.71
The trial court entered a Final Judgment incorporating the jury’s
verdict and the prior order on Mikkelsen’s Motion for Partial
Summary Judgment.72
SUMMARY OF THE ARGUMENT
Although Mikkelsen was largely successful in the trial court, he
was prevented from introducing evidence that was central to his effort
to obtain exemplary damages. The trial court erred by excluding
evidence of Appellants’ pattern of wrongdoing, which was crucial to
showing malice and other factors weighing on whether to award
exemplary damages and in what amount. The trial court also erred by
denying Mikkelsen’s Motion to Compel discovery of Appellants’ net
worth, which precluded Mikkelsen from developing and introducing
71 2 CR 228-258 (App. 6-36) 72 2 CR 334 (App. 1-3).
Brief of Cross-Appellant Page 19 the evidence of net worth that is also essential to his claim for
exemplary damages.
ARGUMENT AND AUTHORITIES
ISSUE 1: The trial court excluded Mikkelsen’s evidence of Appellants’ noncompliance with regulatory requirements and failure to inform the Internal Revenue Service and regulators that the supposed Subchapter “S” conversion was compromised as two classes of stock continue to exist. Was this error?
At trial, Mikkelsen offered evidence relating to regulatory
problems encountered by Appellants, as well as Appellants’ failure to
report to regulators that the summary judgment order had been
entered. As the summary judgment order found that Mikkelsen
continued to own preferred shares in Herring, Herring had more than
one class of shareholders and its Subchapter “S” conversion was void
or at least in jeopardy. It is a critical omission for Appellants not to
bring this information to the attention of the IRS and the appropriate
regulators. Mikkelsen needed to present evidence of these matters to
show a continuing course of dishonest behavior. This evidence would
have assisted the jury in determining whether malice was present and
in determining whether to award exemplary damages. Lacking this
Brief of Cross-Appellant Page 20 critical evidence, the jury found in favor of Appellants on both of these
issues.
A trial court’s decision to admit or exclude evidence is reviewed
under an abuse of discretion standard. Gharda USA, Inc. v. Control
Solutions, Inc., 464 S.W.3d 338, 347 (Tex. 2015). Reversal is appropriate
if the error is harmful; that is, if it probably caused the rendition of an
improper judgment. State v. Central Expressway Sign Assocs., 302
S.W.3d 866, 870 (Tex. 2009). This Court should consider the entire
record in determining whether the evidentiary ruling was harmful. Id.
Mikkelsen need not show that “but for” the exclusion of the evidence a
different judgment would have resulted. Rather, the error was harmful
if the excluded evidence was crucial to a key issue. Id.
Here, the excluded evidence was crucial to the jury’s ability to
analyze whether to award exemplary damages and in what amount. In
making this determination, a jury is to consider (1) the nature of the
wrong, (2) the character of the conduct, (3) the degree of the
wrongdoer’s culpability, (4) the situation and sensibilities of the
parties concerned, (5) the extent to which the conduct offends a public
sense of justice and propriety, and (6) the defendant’s net worth.
Brief of Cross-Appellant Page 21 Alamo Nat’l Bank v. Kraus, 616 S.W.2d 908, 910 (Tex. 1981); Tex. Civ.
Prac. & Rem. Code § 41.011.
The trial court instructed the jury to consider the Kraus factors in
this case,73 but the jury was lacking crucial evidence pertaining to the
character of the conduct, the degree of culpability, the situation and
sensibilities of the parties, and a public sense of justice and propriety.
A factor in determining an award of exemplary damages is whether
the harm involved repeated acts or isolated incidents. Tony Gullo
Motors I, L.P. v. Chapa, 212 S.W.3d 299, 318 (Tex. 2006), citing State Farm
Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 419, 123 S.Ct. 1513, 155
L.Ed.2d 585 (2003). A recidivist is generally more reprehensible, and
may be punished more severely, than a one-time offender. Id. at 309 n.
48, citing BMW of N. Am. v. Gore, 517 U.S. 559, 577, 116 S.Ct. 1589, 134
L.Ed.2d 809 (1996). Mikkelsen was denied an opportunity to
demonstrate the Appellants’ recidivism to the jury.
Although the Kraus factors generally relate to the amount of
exemplary damages, they are important here as to liability because the
“malice” that would justify an award of exemplary damages may be
73 2 CR 249-250 (App. 27-28).
Brief of Cross-Appellant Page 22 shown by direct or circumstantial evidence. See Vernon v. Perrien, 390
S.W.3d 47, 62 (Tex. App.―El Paso 2012, pet. denied).
Mikkelsen attempted to introduce evidence that the FDIC
essentially ordered the removal of Campbell Burgess from the Bank
because, among other things, he “engaged or participated in unsafe or
unsound banking practices, committed or engaged in acts, omissions,
or practices which constitute breaches of his fiduciary duty to the
Bank, and/or violated law or regulation; that the Bank suffered
financial loss and [Campbell Burgess] received financial gain or other
benefit as a result of such practices . . . and that such practices . . .
demonstrate [Campbell Burgess’s] personal dishonesty or willful or
continuing disregard for the safety or soundness of the Bank.”74
Mikkelsen also attempted to introduce evidence of an agreement
between the Bank and the Office of the Comptroller of the Currency
under which the Bank was required to undertake a series of actions to
remedy deficiencies in the Bank’s operations and that, instead of
74 12 RR PX-54 (App. 116); 8 RR 239-243, 245-246; 10 RR 217-218; 222; 225-232.
Brief of Cross-Appellant Page 23 complying, the Bank forfeited its decades-old national charter and
became a state bank.75
Mikkelsen also attempted to introduce evidence of the
Appellants’ failure to notify the Internal Revenue Service and the
FDIC of the potential existence of two classes of stock, after the trial
court had ordered that Mikkelsen continued to own preferred shares.76
If this crucial evidence had been admitted, the jury probably
would have concluded that C.C. Burgess and Campbell Burgess acted
with malice, and that their recidivism, their degree of culpability, and
a public sense of justice and propriety justified an award of exemplary
damages. The trial court erred in refusing to admit this evidence, and
the error was harmful in that it probably resulted in an improper
judgment on the issue of exemplary damages.
ISSUE 2: The trial court denied Mikkelsen’s Motion to Compel the discovery of net worth information. Was this error?
Mikkelsen was also prevented from introducing evidence of the
Appellants’ net worth and, in fact, was not permitted to conduct
75 12 RR PX-53 (App. 95); 8 RR 235-239, 245-246; 10 RR 217-218; 222; 225-232. 76 8 RR 220-228; 232-235; 10 RR 216-232.
Brief of Cross-Appellant Page 24 discovery on the issue. The trial court denied Mikkelsen’s Motion to
Compel discovery of the Appellants’ net worth.77
A trial court’s discovery order is reviewed for abuse of
discretion. Tex. Mut. Ins. Co. v. Navarez, 312 S.W.3d 94, 103 (Tex.
App.―Dallas 2010, pet. denied). A trial court abuses its discretion
when it denies discovery going to the heart of a party’s case or when
the denial compromises a party’s ability to present a viable defense.
Ford Motor Co. v. Castillo, 279 S.W.3d 656, 663 (Tex. 2009).
A defendant’s net worth is relevant in a suit involving
exemplary damages. Lunsford v. Morris, 746 S.W.2d 471, 473 (Tex.
1988). Under the law applicable to this case, a plaintiff who is seeking
to recover exemplary damages is entitled to discovery of the
defendants’ net worth, and is not required to make a prima facie
showing of likely recovery before conducting such discovery. In re
Arpin America Moving Systems, LLC, 416 S.W.3d 927, 929 (Tex.
App.―Dallas 2013, orig. proceeding); In re Jacobs, 300 S.W.3d 35, 40-41
(Tex. App.―Houston [14th Dist.] 2009, orig. proceeding).
77 1st Supp. CR 86-93 (App. 37-43; 44)
Brief of Cross-Appellant Page 25 Here, the Appellants’ net worth is crucial evidence that
Mikkelsen needed in order to present his case for exemplary damages.
Mikkelsen’s pleadings request an award of exemplary damages.78 The
jury was instructed to consider net worth as one of the Kraus factors,79
but heard no evidence on the subject because the trial court did not
permit Mikkelsen to develop it. The order denying Mikkelsen’s
Motion to Compel discovery of net worth information was an abuse of
discretion that prevented Mikkelsen from developing crucial evidence
going to the heart of his case for exemplary damages. This denial
probably resulted in an improper judgment, and it should be reversed
and a new trial ordered on the issue of exemplary damages.
CONCLUSION
While Mikkelsen succeeded on most of his claims, the trial court
erred by denying him the opportunity to demonstrate Appellants’
dishonest recidivism and net worth. This error prevented Mikkelsen
from presenting evidence that was crucial to his claim for exemplary
damages. If the evidence had been admitted, the jury probably would
78 2 CR 160 (App. 65). 79 2 CR 249-250 (App. 27-28).
Brief of Cross-Appellant Page 26 have awarded Mikkelsen exemplary damages. The trial court’s
judgment should be reversed to the extent it fails to award exemplary
damages to Mikkelsen, the trial court’s order denying Mikkelsen’s
motion to compel discovery of net-worth information should be
reversed, Mikkelsen should be permitted to conduct net-worth
discovery, and the Court should order a new trial on the issue of
malice and exemplary damages to the extent permitted, or at a
minimum grant Mikkelsen this relief if the case is otherwise remanded
to the trial court.80
PRAYER
Mikkelsen respectfully requests the Court to reverse the Final
Judgment to the extent it fails to award exemplary damages to
Mikkelsen, to render judgment that Mikkelsen is entitled to recover
exemplary damages or to order a new trial on this issue, to order a
new trial on the issue of the amount of exemplary damages to be
awarded, to reverse the trial court’s Order denying Mikkelsen’s
80There is authority for remanding a case for a new trial on the issue of exemplary damages. See McElroy v. Fitts, 876 S.W.2d 190, 199 (Tex. App.―El Paso 1994, writ dism’d). However, should the Court determine such relief to be inappropriate, Mikkelsen alternatively seeks remand on these issues if the case is otherwise remanded.
Brief of Cross-Appellant Page 27 Motion to Compel discovery of net-worth information, to instruct the
trial court to order the discovery of such information, and to grant
Mikkelsen all other relief he is entitled to receive. Alternatively,
Mikkelsen seeks this relief in the event the case is otherwise remanded
to the trial court.
Respectfully submitted,
__/s/ Michael L. Atchley________ Lee F. Christie State Bar No. 042317100 hray@popehardwicke.com Michael L. Atchley State Bar No. 01397600 matchley@popehardwicke.com Pope, Hardwicke, Christie, Schell, Kelly & Ray, L.L.P. 500 W. 7th Street, Suite 600 Fort Worth, Texas 76102 817.332.3245—Telephone 817.877.4781—Telecopier
ATTORNEYS FOR CROSS-APPELLANT
Brief of Cross-Appellant Page 28 CERTIFICATE OF COMPLIANCE
1. This brief complies with the type-volume limitations of Texas Rule of Appellate Procedure 9.4(i)(2)(B) because it contains 5,358 words, excluding the parts of the brief exempted by Texas Rule of Appellate Procedure 9.4(i)(1).
2. This brief complies with the typeface requirements of Texas Rule of Appellate Procedure 9.4(e) because this brief has been prepared in a proportionally spaced typeface using “Microsoft Word 2010” in 14-point “Book Antiqua” style font (12-point for footnotes).
/s/ Michael L. Atchley Michael L. Atchley
CERTIFICATE OF SERVICE
I hereby certify that a true and correct copy of the foregoing document is being forwarded to all counsel of record via electronic filing on November 20, 2015, as follows:
Thomas S. Leatherbury Cornell D. Curtis State Bar No. 12095275 State Bar No. 24007069 tleatherbury@velaw.com vernonlaw@sbcglobal.net Manuel G. Berrelez CORNELL D. CURTIS, P.C. State Bar No. 24057760 1716 Main Street mberrelez@velaw.com Vernon, Texas 76834 Stephen S. Gilstrap State Bar No. 24078563 sgilstrap@velaw.com VINSON & ELKINS, LLP 2001 Ross Avenue, Suite 3700 Dallas, Texas 75201
Brief of Cross-Appellant Page 29 No. 07-15-00327-CV
IN THE COURT OF APPEALS FOR THE SEVENTH DISTRICT OF TEXAS AT AMARILLO
HERRING BANCORP, INC.; C.C. BURGESS; and C. CAMPBELL BURGESS,
JOHN MIKKELSEN, acting solely in his capacity as Trustee of the John Mikkelsen Trust,
On Appeal from the 46th Judicial District Court Wilbarger County, Texas, Trial Court Cause No. 24,955 Honorable Dan Mike Bird, Presiding
INDEX TO APPENDIX TO BRIEF OF CROSS-APPELLANT
Document Pages
Final Judgment (2 CR 335-336)................................................................ 1-3
Order on Motion for Partial Summary Judgment (2 CR 306-307) ..... 4-5
Jury Charge (2 CR 228-258) ................................................................... 6-36
Plaintiff’s Motion to Compel (1st Supp. CR 86-92) ........................... 37-43
Order Denying Plaintiff’s Motion to Compel (1st Supp. CR 93) ........ 44
Brief of Cross-Appellant Page 30 Document Pages
Plaintiff’s Original Petition (1 CR 5-17) .............................................. 45-57
Plaintiff’s First Amended Original Petition (2 CR 153-161) ............ 58-66
Herring Articles of Incorporation (12 RR PX-2) ................................ 67-89
Notice of Redemption (12 RR PX-13) .................................................. 90-92
List of Preferred Shareholders (12 RR PX-25) .......................................... 93
Shareholder List Showing Conversion Rate (13 RR DX-12) .................. 94
Herring Agreement with the OCC (12 RR PX-53) .......................... 95-115
FDIC Order Regarding Campbell Burgess (12 RR PX-54) ........... 116-141
Brief of Cross-Appellant Page 31 334334334334334
C.AUSE CAUSE NO. 24,955 24.955 Sy _ ____ _ _ _ _ _ _ __ Oc~:_.iy JOHN MIKKELSEN, MIKK ELSEN. IN TH E DISTRICT COURT [N THE T'rust ee acting solely in his capacity as Trustee of the John M.ikkelsen t\Aikke1sen Trust, 'rrust
Plaintiff. Plaintiff:
v. WI LBARG ER COUNTY. WILBARGER COUNTY TEXAS
HERRING IIERRlNG BA.i."i"CORP, BANCORP, INC.;INC; c.c. BURGESS; C.C. BURGESS, and C. CAMPBELL. CAMPBELl. BURGESS, BURGESS.
Defendants. 46TH 46TI-I JUDICIAL DISTRICT
FINAL FIN AL .JUDGMENT ,JUDG MENT
On January 30, 2015, calls~ came on to be heard, and John 1 20 [5 , this cause vlikkelscn., Mikkel sen, acting solely in
his capacity as Trustee of the John Mikkelsen Trust, Plaintiff. Plaintiff, appeared in person and by att:orney <.Htomey
of record and announced ready frrr ofrecord trial , and Herring Bancorp, lor trial, lotc., C.C. Bancorp. Inc., C.C Burgess, and C. Campbell
Burgess, Defendants, appeared in in person or by by attorney of record record and announced announcc-d ready read y for lor trial,
and a jury having havin g been previously previollsly demanded, dC.l11.anded. a jury consisting qu ~di1'ied jurors was duly consi sting of 12 qualified
empaneled and the case proceeded to trial. Irial.
Th{~ Court, by granting The Plaimiffs lvfotion gnmti ng Plaintiff's !vl01ion th f(wr Partia. Parti::l]I Surnmary Su mmary .Judgment Judgment on August 4, 4.
1, gmnted 201 I, gmntcd Plaintiff's Plaintiff"s breach of contract claim in Count One of Plaintiffs Plai ntiffs First Amended
Original P"lijiot], and the Order granting Plaintiff's Origi nal Petit.ion, Plaintitrs Motion, attach~d hereto MOlion, which is copied and attached
as Exhibit "A," "A." is incorporated herein. pect. to Count Four of Plaintiff's First Amended rcSPCCt.lO herein . With res
Original Petition, Petition. which alleged that an October 2006 purported redemption of Plaintiffss preferred ofPlaimifr
Ilcrring Bancorp, shares in Herring Bancorp. In Inc. constiiuted unlawful oppression of a rninority c. constituted minority shareholder, shareho lder, the
Court submiltcd submitted said issue isslle to the jury, jury" and the jury returned. returned its verdict '.-'erdict in ace,ordance accordance with the
instructions of of the Court. COtU1. The Tlle charge of the Court C(n1l1 and the verdict. verd ict of of the jjury ury are copied and
F INAL FfN ,Jfil.lGM AL,} ENT t iUC;MENT f',\(; E I
Appendix p. 1
334 335335335335335
Exh ibit " B" and incorporated attached hereto as Exhibit purposes by ineorpomted for all purposes by reference. Because the Court COU l1
forPI found for ~1intiff and it appears Plaintiff ;;'ppears to the Court that rhe fh e verdict vcordict of the jury was for fOT the Plaintiff Plaintilf and
against Burgess, and C. Campbel! again.st Defendant Herring Bancorp, Inc., C.C. Burge.ss, Carnpbell Burgess, the Court finds
that judgment should be rendered as herein herei n provided. It is, therefore,
ORDERED. ORDERED, ADJUDGED, and DECREED that Plaintiff.John Mikkelsen have and tiHri PlaintiJI'John a.nd recover
from th.is Court a declarntory from this declamtory judgment whereby this th is Court declares, pursuant to the Texas
Dec.laratory jury· 's verdict. Oechtratory Judgments Act and the jury's verd ict. that the purpo rted October 2006 and November purported
2013 redempfions of the preferred 201 3 redemptions o f' Plaintiff John Mikkelsen were void and of no force or preferrt:d shares of
eficct, eft.ect. and did not deprive PI::lintiff hi s status as a prcforred Plaintiff of his preferred shareholder ooff Herring Bancorp. IJancorp,
Inc. Ac.cordingly, A(..'C.ordingiy, Plaintiff ti mes had and has Plai ntiff at all times ·has the right to inspect ins pect the books and records of
Herring Bancorp, lnc. Inc. The :finds that DeJendanr 'rhe Court further finds Dcf'~nd a n[ Herring J.-h.~ rTing Bancorp, Bancorp. Inc. breached its
An.icles of In. Arti.cles Incorporation c orporation and that Defondants c.c. DeJendant<; C .C. Burgess and C. Campbell Burgess wrongfully wTongfully
engaged e.ngaged in oppressive conduct cunduct towards towards Plaintiff, PlaintitT. as found Ibund bbyy the jury. In cmmection therewith, connect ion lhere.wilh.
find s, and it is ORDERED, A the Court further finds, ADJ UDGED, and D DJUDGED, DECREED ECREED that the Plaintiff
remains a preferred shareholder of uf said Herring He.rring Bancorp, Banco rp, Inc ., is entitled to 10 have and recover of
and from Defendant J·krring H t'rring Bancorp, Bancorp. Inc., C.C C. C . Burgess, Burgess. and C. Campbell Burgess, jointly joint ly and
severally, judgment in the amount of $23, 1I2.00. 11 2.00, representing rep.resenting prefened preferred dividends on Plaintiff's PlaintilTs
preferred shares i.n prcforred IJcrring Bancorp, Inc. fron1 in !Ierring from and after October Cktobcr 31, 31 2006, 2006. through December 331. l,
20 14, plus 2014,
amount of $.;;S:..~212i?.:.'2.. -- plus prejudgment interest thereon through tbrough the date of
$~'.ll7-....-L?:-" It is furtfa:r furth er o f judgment j udgment rendered herein herein in the
ORDERED. ADJU DG ED, and ORDERED, ADJUDGED, ~md DECREED that 1hm Plaintiff Mikkelsen should Plaintiff John M.ikkelsen sbould have and
recover of and from the Defendant H.crring B f-lerrillg ancorp, Inc. judgment Bancorp, j udgment for his reasonable and
n.~cs. as awarded necessary attorneys' foes, award ed by the jury, amollnt of j ury. in the amount of $1 27,442.00 for preparation $127,442.00 preparati.on
"INALJL FINAL r)(~!\II\l\T .JtOGMl':NT PMa: 2 PAGl:::
·· -.....
Appendix p. 2
335 336336336336336
and trial ofchis oftbis cause, and the addi additional t.ional sum of $25,000.00 for an appeal to the Court of Appeals, of$25,OOO,QO Appea ls.
$10,000.00 for fbI' representation the petition representati on at t.hc pelition for fo r review stage in the Supreme Court of Texas, of'l'exas,
$10,000.00 meril briefing $1 0,000.00 for representation at the merit brie fi ng stage slagc in the Court Qf lhe Supreme COUlt of Texas, and
$10,000.00 $10.000.00 for representation through oral argument and completion wmpletion of proceedings in the the
COlin of Texas. It Supreme Court 'It is t11rther further
ORDERED, ORD ERED, ADJUDGED, t.hat all and DECREED that ADJUDGED. am] aU costs of court should ,Ire s hould be and hereby are or taxed jointly and iilnd severally against Defendants Herr.ing Bancorp. Defendants lIcrring Ihll1(',orp, Inc., C.C C .C.. .13 Burgess, urgcss, and C.
Campbell Burgess. It is further funher
OR DERED, ADJUDGED, ORDERED, ADJU DGED , and DECREED D ECRE ED that the the contract co ntract award of$23 ,,1I I12,00 2.00 shall bear
interest from the date dale this Judgment is signed at the rate IhisJudgmcnt ratc often percent (10%) per annum until paid.
ItIt is further
ORDERED, AD.JUDGED, ADJUDGED, and DECREED that the other monetary awards shall bear
Judgment is signed at the rate interest from the date this .Judgment rale of (5%) per annum until paid. five percent (5'%) ofiive
It is further
ORDERr:::D. ADJUDGED, and DECREED that all relief not expressly herein granted is ORDERED, ADJUDGED.
denied, and this is intended to be a fi nal, nal. appealable judgrnent. judgment.
SIGNEDthis SIGNED this - 1.t It dayof PAGE 3 ..,,,__...,.,..... ... ,..,_,,,_,,....,....,._ _.._ _ __ •.;."'·-·- ;.....;.;.;;,;;;·"-.;.;···::..:.~c ··......... Appendix p. 3 336 306306 '~ .~ - .. fllEr)"- .- Fs(EO~···· ~, ~' ~~ lf_da.yof~~ The 4_d8Y of (4,L or 20L At -cro At_cr:-D o'cloc':J< o'clockJL_M: o'cloi:.li< titl o'c!ockfLM: Brenda Peterson GjeT;k DisL ~Ol # liibarger Co. ._CAUSE NO. NO_ 24,955 l3y~ Dep.;'Y JOHN MIKKELSEN, § IN THE DISTRICT COURT acting sol.ely sol,ely in his capacity as Trustee § of the John Mikkelsen Trust, § § Plaintiff, § § v. § WILBARGER COUNTY, TEXAS § HERRING BANCORP, INC.; § C.C. CC. BURGESS; and § C. CAMPBELL BURGESS, § § Defendants_ Defendants. § 46TH JUDICIAL DISTRICT ORDER Plaintiffs Motion for Partial Summary Judgment ("Plaintiffs Motion") and Defendants' Cross-Motion for Summary Judgment ("Defendants' Motion") came on for hearing on April 18, 201 L The Court finds Plaintiffs Motion was timely filed and that notice of Plaintiffs Motion and the hearing thereon was duly and properly given. The Court also finds that Defendants' Motion was timely filed and served by agreement of the parties, and hereby grants leave to file and ser\ie serVe the Motion on less than 21-days' notice prior to the hearing. The Court also finds that Plaintiffs Plaintiff s Response to Defendants' Motion was timely filed. filed and served by agreement of the parties, and hereby grants Plaintiff leave to file and serve the Response and the evidence attached thereto, including discovery products, within seven days of the hearing. After considering Plaintiff's Plaintiff s Motion and the Response thereto, and after considering Defendants' Motion and the Response thereto, and after considering the admissible summary judgment evidence and the arguments of counsel, the Court finds that Plaintiffs Motion should be granted and Defendants' Motion should be denied. ORDER PAGEl Appendix p. 4 !. 306 307307 ...·-· '-' ~ ~ - -- - -- ~------.~ ~ ---- · ----- '--- -- -~---~~~-~- ----~~-- IT IS THEREFORE ORDERED that Defendants' Cross-Motion for Summary Judgment is denied in its entirety. IT IS FURTHER ORDERED that Defendants' Special Exceptions and Plea in Abatement are overruled and denied. IT IS FURTHER ORDERED that Plaintiffs Motion for Partial Summary Judgment is granted in all respects. The Court further finds as a matter of law that (1) the purported redemption of Plaintiffs Plaintiff's 300 shares of preferred stock of Herring Bancorp, Inc. (the "Company.") "Company," ) was undertaken in violation of the Company's Company' s Articles of Incorporation and is void and (2) that Plaintiff is, and continues to be, the holder of 300 shares of the Company's preferred stock, and has all the rights of300 appurtenant thereto, including the right to inspec the Company's books and records. SIGNED "0 ili, 'if:- d., "f_-I-4~~~:""""'_ __ ' 2011. Approved as to form: Lee F. Christie, Counsel for Plaintiff Jam es W. James W. Bowen, Counsel for Defendants ORDER PAGE2 Appendix p. 5 [ 307 228228228228228 CAUSE NO. 24,955 JOHN MIKKELSEN, Acting Solely in his 46TH DISTRICT § IN THE 46rn DlSTRJCT COURT Capacity as Trustee of the John Mikkelsen § Trust, § § Plaintiff/Counter Defendant, § § v. § IN AND FOR § § BANCORP., HERRING BANCORP ., INC., C.C. § BURGESS and C. CAMPBELL BURGESS, § Defendants/Counter-Plaintiffs. § WILBARGER COUNTY, TEXAS CHARGE TO THE JURY LADIES AND GENTLEMEN OF THE JURY: This case is submitted to you by asking questions about the facts, facts, which you yOll must decide from the evidence you have heard in this trial. You are the sole judges of the credibility of the witnesses and the weight to be given their testimony, but in matters of law, you must be governed by the instructions in this charge. In discharging your responsibility on this jury, you will observe all the instructions which have previously been given you. IJ shall now give you additional instructions which you should carefully and strictly follow during your deliberations. I.J. deliberations. Do not let bias, prejudice or sympathy play any part in your deliberations. u. II. In arriving at your answers, consider only the evidence introduced here under oath and such exhibits, if any, as have been introduced for your consideration under the rulings of the Court; that is, what you have seen and heard in this courtroom, together with the law as given you by the Court. Appendix p. 6 CHARGE TO THE JURY PAGE 1OF30 1 OF 30 228 229229229229229 In 10 your deliberations, you will not consider or discuss anything that is not represented by the evidence in this thi s case. Since every answer that is required by the charge is important, no juror should state or consider that any required answer is not important. IV. You must not decide who you think should win, and then try to answer the questions accordingly. Simply answer the questions, and do not discuss nor concern yourselves with the effect norconcem of your answers. v. V. You will not decide the answer to a question by lot or by drawing straws, or by any other method of chance. Do not return a quotient verdict. A quotient verdict means that the jurors agree tbe result to be reached to abide by the reacbed by adding together each juror's figure and dividing by the number eacbjuror's of jurors to get an average. Do not do any trading on your answers; that is, one juror should not agree to answer a certain question one way if others will agree to answer another question another way. VI. You may render your verdict upon the vote often of ten or more members of the jury. The same ten or more of you must agree upon all of the answers made and to the entire verdict. You will not, not. therefore. enter into an agreement to be bound by a majority or any other vote or therefore, of less than ten jurors. If the verdict and all aU of the answers therein are reached by unanimous agreement, the presiding juror presidingjuror shall sign the verdict for the entire jury. If 1f any juror disagrees as to any answer made by the verdict, verdict. Appendix p. 7 CHARGE TO THE JURY PAGE 2 OF30 PAGE2 OF 30 229 230230230230230 those jurors who agree to all findings shall each sign the verdict. verdict. VII. These instructions are given to you because your conduct is subject to review the same as that of the witnesses, parties, attorneys and the judge. If thejudge. Ifit it should be found that you have disregarded any of these instructions, it will be jury misconduct and it may require another trial by another jury; then all of our time will have been wasted. VIII. The presiding juror or any other who observes a violation of the Court's instructions shall immediately warn the one who is violating the same and caution the juror not to do so again. When words are used in this charge in a sense which varies from the commonly understood meaning, you are given a proper legal definition, which you are bound to accept in place ofany other meaning. x. X. Answer by checking "Yes" or "No" to all questions unless otherwise instructed. A "Yes" evidence, If you do not find that a preponderance answer must be based on a preponderance of the evidence. of the evidence supports a "Yes" answer, then answer "No." If the question directs you to give an answer other than "Yes" or "No," "No," you must still base your answers on a preponderance of the evidence with respect to each matter inquired about in the question. Preponderance of the evidence means the greater weight and degree of credible testimony or evidence introduced before you and admitted in evidence in this case. XI. Appendix p. 8 CHARGE TO THE JURY PAGE PAGE33 OF 30 230 231231231231231 After you retire to the jury room, you will select your own presiding juror. The first thing presidingjuror the presiding juror will do is to have this complete charge read aloud together with the accompanying instructions and then you will deliberate upon your answers to the questions asked in the verdict form. It is the duty of the presiding juror to: fonn. (1) Preside during your deliberations. (2) See that your deliberations are conducted in an orderly manner and in accordance with the instructions in this charge. (3) Write out and hand to the bailiff any communications concerning the case that you desire to have delivered to the Judge. (4) Conduct voting on each question. (5) Write your answers to the questions in the spaces provided. ((6) 6) Certify to your verdict in the space provided for the presiding juror's signature, or to obtain the signatures of all the jurors who agree with the verdict if your verdict is less than unanimous. XII. You should not discuss the case with anyone, not even with other members ofthe jury, unless all of you are present and assembled in the jury room. Should anyone attempt to talk to you about the case before the verdict is returned, whether at the courthouse, or your home, or elsewhere, please infonn the Judge of this fact. inform XIII. When you have answered all the questions you are required to answer under the instructions of the Judge and your presidingjuror presiding juror has placed your answers in the spaces provided and signed the infonn the bailiff at the door of the jury verdict as presiding juror or obtained the signatures, you will inform Appendix p. 9 CHARGE TO THE JURY PAGE 4 OF 30 PAGE40F30 231 232232232232232 room that you have reached a verdict, and then you will return into Court with your verdict. SIGNED this :2() :':;?() day of January, 2015. 20 15. HaD~u 21fh/~ HONORABLE DAN MIKE BIRO 4611h11 District Court Judge F,.t-) I I 30!, P,/e;) 1/ )O/1 5 5- A tVj ~Cf.~f{) A ~Cf:1fV 0; 0/ V~--~ -!~'1--<=-- ~ ;/30/15- //30/15- d' ~ :5-. 5- /=> Pf11/11 h7 Appendix p. 10 CHARGE TO THE JURY PAGES5 OF 30 PAGE 232 233233233233233 DEFINITIONS AND INSTRUCTIONS You are instructed that when words are used in the Questions in a sense which varies from the meaning commonly understood, you will be given in this Charge a proper legal definition which you are bound to accept in the place of any other definition or meaning. In answering the Questions you shall give the following terms the following meanings: 1. The term "preponderance of the evidence" means the greater weight of credible evidence presented in this case. If you do not find that a preponderance of the evidence supports a no." A preponderance of the evidence is not measured by the number "yes" answer, then answer " no," of witnesses or by the number of documents admitted in evidence. For a fact to be proved by a preponderance of the evidence, you must find fi nd that the fact is more likely true than not true. A fact fac t may be established by direct evidence or by circumstantial evidence, or both. A fact is established by direct evidence when proved by documentary evidence or by witnesses who saw the act done or heard the words spoken. spoken . A fact is established by circumstantial evidence when it may be fairly and reasonably inferred from other facts proved. 2. A fact may be established by direct evidence or by circumstantial evidence or both. A fact is established by direct evidence when proved by documentary evidence or by witnesses who saw the act done or heard the words spoken. A fact is established by circumstantial evidence when it may be fairly and reasonably inferred from other facts proved. 3. "Mikkelsen" means Plaintiff John Mikkelsen, Mikkel sen, acting solely in his capacity as Trustee of the John Mikkelsen Trust and his agents, attorneys, and representatives acting in the course and scope of their agency or employment. CHARGE TO THE JURY PAGE 6 OF30 OF 30 Appendix p. 11 233 234234234234234 4. "Herring Bancorp" Bancocp" means Herring Bancorp, Inc., and its agents, attorneys, employees, officers, directors, and representatives acting in the course and scope oftheir agency or employment. 5. "C.C. Burgess" means c.c. C.C. Burgess and his agents, attorneys, and representatives acting in the course and scope of their agency or employment. 6. "Campbell Burgess" means C. Campbell Burgess and his agents, attorneys, and representatives acting in the course and scope of their agency or employment. 7. The "Articles oflncorporation" ofIncorporation" means and refers to the Articles oflncorporation ofIncorporation of Herring (Plaintiff's (Plaintiff s Exhibit "2"). INSTRUCTION REGARDING BREACH OF ARTICLES OF INCORPORATION You are instructed that the Court has previously determined, as a matter of law, that Defendant Herring failed to comply with the Articles of Incorporation of Herring Bancorp when it purported to involuntarily redeem Mikkelsen's preferred shares in 2006. However, this failure to comply with the Articles of Incorporation, standing alone, is not sufficient to constitute minority oppression or breach of fiduciary duty. CHARGE TO THE JURY PAGE70F30 PAGE 70F 30 Appendix p. 12 234 235235235235235 OUESTION NO I: QUESTION What is a reasonable fee for the necessary services of Mikkelsen's attorney in connection with the failure of Herring Bancorp to comply with the Articles of Incorporation? In answering this Question, Question. you are to consider the attorney's fees and expenses incurred and reasonably anticipated to be incurred by Mikkelsen in enforcing his rights in this action and any appeal thereof. In determining the amount of attorney's fees and expenses, you are to consider the following: • the time and labor involved, the novelty and difficulty of the questions involved, involved. and the skill required to perform the legal services properly; • the likelihood that the acceptance of the particular employment will preclude other employment by the lawyer; • the fee customarily charged in the locality for similar legal services; • the amount involved and the results obtained; • the time limitations imposed by the client or the circumstances; • the nature and length of the professional relationship with the client; • the experience, reputation, and ability of the lawyer or lawyers performing the services; and • whether the fe. feee is fixed or contingent on results obtained or uncertainty of collection before the legal services have been rendered. CHARGE TO THE JURY PAGE 8 OF 30 PAGE80F30 Appendix p. 13 235 236236236236236 Answer with an amount for each of the following: a. For preparation in the trial court. Ij ANSWER: /a 'Z La Z t/f~ ~o tit$. d() b. b. For representation through appeal to the Court of Appeals. ANSWER: _-1-.J.Ja.='f~/_..6?/lJ~,~112'------------ ANSWER: _-bJ4'J.;~,--",41fb",-,-,. 112"'---_ __ _ __ __ __ c. For representation at the petition for review stage in the Supreme Court of Texas. ANSWER: _-'-;;-';~'-'8P"-",,,-,.Illl""---_ _ _ _ _ _ _ _ _ __ d. d. For representation at the merits briefing stage in the Supreme Court of Texas. ANSWER: _~~~~4.~~~U~~.uqb~_ _ ____________________ e. For representation through oral argument and the completion of proceedings in the Supreme Court of Texas. ANSWER: /P.I l~tl /p, POt? . If? ti'() CHARGE TO THE JURY PAGE 9 OF 30 PAGE90F30 Appendix p. 14 236 237237237237237 OUESTION NO. QUESTION NO.2: 2: Do you find that C. C. Burgess engaged in oppressive conduct toward Mikkelsen? "Oppressive conduct" means burdensome, harsh, harsh. or wrongful conduct; a lack ofprobity and fair dealing in the company's affairs to the prej prejudice udice of some members; members; or a visible departure from the standards of fair dealing and a violation of fair play on which each shareholder is entitled to rely. It also means unfair treatment of minority shareholders by the directors or those in control the corporation. Answer "yes" or "no." Answer: ~..._a6'..___ _ _ _ __ Answer: -----= -~~'l}9Ai",-------- CHARGE TO THE JURY PAGE 100F30 10 OF 30 Appendix p. 15 237 238238238238238 OUESTION NO.3: QUESTION NO. 3: Do you find that Campbell Burgess engaged in oppressive conduct toward Mikkelsen? "Oppressive conduct" means burdensome, harsh, or wrongful conduct; a lack of probity and fair dealing in the company's affairs to the prejudice of some members; or a visible departure from the standards of fair dealing and a violation of affair fair play on which each shareholder is entitled to rely. affair It also means unfair treatment of minority shareholders by the directors or those in control of the corporation. corporation. ''yes" or "no." Answer "'yes" Answer: -"""""?'"l"t...41"'-------- --'9'1' "' CHARGE TO THE JURY 11 OF 30 PAGE 11OF30 Appendix p. 16 238 239239239239239 -f--.r 4+ :2. "" 13 dd n o/~#f-. QUESTION NO. 4: What sum of money, if any, if paid now in cash, would fairly and reasonably compensate Mikkelsen for his damages, if any, that proximately resulted from such oppressive conduct, if any, if any. you have found? Consider the following elements of damages, if any. any, and none other: other: The lost dividend 21,, 2006 until January 26, 2015. income on Mikkelsen's preferred shares from November 21 Answer in dollars and cents. Answer: $ .j 3 3 ,23, It( 8'0 3/t( I CHARGE TO THE JURY PAGE 12 120F30 OF 30 Appendix p. 17 239 240240240240240 NO.5: QUESTION NO. 5: Answer the following question only if you unanimously answered "yes" '"yes" to Question No. 2. No.2. Otherwise, do not answer the following question. To answer "Yes" to the following question, your answer must be unanimous. You may answer "No" to the following question only upon a vote of often ten or more jurors. Otherwise, you must not answer the following question. Do you find by clear and convincing evidence that the harm hann to Mikkelsen resulted from malice? "Clear and convincing evidence" means the measure or degree of proof that produces a firm finn belief or conviction of the truth of the allegations sought to be established. "Malice" means a specific intent by C.C. C,C. Burgess to cause substantial injury or harm to Mikkelsen. Answer: _ ·.-n.L..a..__ L. ''-_ _Lll1Jl' __ _____ CHARGE TO THE JURY \3 QF PAGE 13 OF 30 Appendix p. 18 240 241241241241241 QUESTION OUESTION NO. 6: NO.6: Answer the following question only if you unanimously answered "yes" to Question No. 3. No.3. To answer "Yes" to the following question, your answer must be unanimous. You may answer "No" to the following question only upon a vote vole of ten or more jurors. Otherwise, you must often Do you find by clear and convincing evidence that the harm to Mikkelsen resulted from "Clear and convincing evidence" means the measure or degree of proofthat produces a firm belief or conviction of the truth of the allegations sought to be established. established, "Malice" means a specific intent by Campbell Burgess to cause substantial injury or harm hann to Mikkelsen. AJo ' .., CHARGE TO THE JURY PAGE 140F30 Appendix p. 19 241 242242242242242 OUESTION NO. QUESTION NO.7: 7: Answer the following question only if you unanimously answered "yes" to Question No. 5. No.5. You must unanimously agree on the amount of any award of exemplary damages. What sum of money, money. if any. any, paid now in cash, should be assessed against C.C. Burgess and awarded to Mikkelsen as exemplary damages, if any. any, for the conduct found in response to Question 2? "Exemplary damages" means an amount that you may in your yow discretion award as a penalty or by way of punishment. Factors to be considered in awarding exemplary damages, if any, any. are- a. The nature of the wrong. b. The character of the conduct involved. c. The degree of culpability of C.C. C.c. Burgess. d. d. The situation and sensibilities of the parties concerned. concerned. e. The extent to which such conduct offends a public sense ofjustice and propriety. propriety. f. The net worth of C.C. Burgess. Answer in dollars and cents, if any. Answer: $_ _ _ __ __ CHARGE TO THE JURY PAGE 15 OF 30 OF30 Appendix p. 20 242 243243243243243 QUESTION NO.8: NO. 8: Answer the following question only ifyou unanimously answered "yes" ''yes" to Question No. 6. You No.6. must unanimously agree on the amount amoWlt of any award of exemplary exemplruy damages. What sum of money, money. ifany, any. paid now in cash, should be assessed against Campbell Burgess and awarded to Mikkelsen as exemplary damages, if any, for the conduct found fOlUld in response to Question 3? "Exemplary damages" damages" means an amount amoWlt that you you may in your discretion award as a penalty or by way of punishment. Factors to be considered in awarding exemplary damages, if any, ar~ are-- a. a The nature of the wrong. b. The character of the conduct involved. c. Burgess. c. The degree of culpability of Campbell Burgess. d. The situation and sensibilities of the parties concerned. concerned. e. The extent to which such conduct offends a public sense ofjustice and propriety. f. The net worth of Campbell Burgess. Answer: $,_ _ _ _ _ _ __ CHARGE TO THE JURY PAGE 16 OF 30 Appendix p. 21 243 244244244244244 JURy QUESTION JURY OUESTION NO. 9: NO.9: Do you find that C. C. Burgess used his personal control of Herring Bancshares to breach fiduciary duties owed to Mikkelsen? In connection with the foregoing question, you are instructed that a majority shareholder of a corporation owes fiduciary duties to a minority shareholder and to show compliance with those duties must show he acted fairly and equitably, in the utmost good faith with the most scrupulous honesty, fully and fairly disclosing all important information to a minority shareholder such as Answer "yes" or ""no." no." Answer: -......:1"""t4> Answer: _______ --'j'Vlill""-- - - - -_- CHARGE TO THE JURY PAGE 17 OF 30 Appendix p. 22 244 245245245245245 QUESTION NO. I10: 0: Do you find that Campbell Burgess used his personal control ofHerring Bancshares to breach In connection cormection with the foregoing question, question. you are instructed that a majority shareholder of a corporation owes fiduciary duties to a minority shareholder and to show compliance with those duties must show he acted fairly and equitably, in the utmost good faith with the most scrupulous honesty, fully and fairly disclosing all important information to a minority shareholder such as Answer: />h NfA CHARGE TO THE JURY PAGE 18 OF 30 Appendix p. 23 245 246246246246246 -f1 y 1~ T yrvz "'? ~.,~e.d Arv.5 w-er e.J \Iy \rYe.., e-5 r /"I'/ -fer-# 9 "/ -p-# "I !{) I() q, n ~~ qn5W"U' ¢:!=:-/( ¢:f:-/( I d~r-,;rCV/15'~-:;t;/f ~ ~ d"'-~_5'~"#(! ~~ QUESTION NO. 11: What sum of money, money. if any, if paid now in cash, would fairly and reasonably compensate Mikkelsen for his damages, if any, that proximately resulted from such breaches of fiduciary duties, if any you have found? if Consider the following elements of damages, if any, and none other: The lost dividend income on Mikkelsen's preferred shares from November 21, 2006 until January 26, 2015. 0.. .:.00,,---_ Answer: $$,-~----- --=:0-,- IJO _ __ CHARGE TO THE JURY PAGE 19 OF 30 Appendix p. 24 246 247247247247247 QUESTION NO. 12: Answer the following question only if you unanimously answered "yes" to Question No. ii: . . 7 f Otherwise, do not answer the following question. To answer "Yes" to the following question, your answer must be unanimous. You may answer "No" to the following question only upon a vote often of ten or more jurors. Otherwise, you must Do you find by clear and convincing evidence that the harm to Mikkelsen resulted from "Clear and convincing evidence" means the measure or degree of proof that produces a firm belief or conviction of the truth of the allegations sought to be established. "Malice" means a specific intent by C.C. Burgess to cause substantial injury or harm hann to Answer: ___._ -1.I1~6 1.'J-".6____ _ _ _ __ _ CHARGE TO THE JURY PAGE 200F 20 OF 30 Appendix p. 25 247 248248248248248 OUESTIONNO. OUESTION NO. 13: Answer the following question only ifyou unanimously answered "yes" to Question No. 10. 1O. To answer "Yes" to the following question, your answer must be unanimous. You may answer "No" to the following question only upon a vote of ten or more jurors. Otherwise, you must often Do you find by clear and convincing evidence that the harm to Mikkelsen resulted from "Clear and convincing evidence" means the measure or degree of proofthat produces a firm belief or conviction of the truth of the allegations sought to be established. " Malice" means a specific intent by Campbell Burgess to cause substantial injury or harm "Malice" hann Answer: _ _ _ _ _ _ __ CHARGE TO THE JURY PAGE21OF30 PAGE 21 OF 30 Appendix p. 26 248 249249249249249 QUESTION OUESTION NO. 14: Answer the following question only ifyou unanimously answered "yes" to Question No. 12. You must unanimously agree on the amount of any award of exemplary damages. cfany damages. What sum ofmoney, if any, paid now in cash, should be assessed against C. C. Burgess and awarded to Mikkelsen as exemplary damages, if any, for the conduct found in response to Question ifany. 9? "Exemplary damages" means an amount that you may in your discretion award as a penalty or by way of punishment. Factors to be considered in awarding exemplary damages, if any, any. are-- a. The nature of the wrong. b. The character of the conduct involved. c. The degree of culpability of C. C. Burgess. d. The situation and sensibilities of the parties concerned. d. e. The extent to which such conduct offends a public sense of justice and propriety. f. The net worth of C. C. Burgess. Answer in dollars and cents, if any. any. Answer: $,_ __ _ __ __ CHARGE TO THE JURY JVR Y PAGE 22 OF 30 Appendix p. 27 249 250250250250250 QUESTION OUESTION NO. 15: 15: Answer the following question only if you unanimously answered "yes" to Question No. 13. You must unanimously agree on the amount of any award of exemplary damages. money. if any, paid now in cash, should be assessed against Campbell Burgess What sum of money, any, for the conduct found in response to and awarded to Mikkelsen as exemplary damages, if any. O? Question 110? "Exemplary damages" means an amount that you may in your discretion award as a penalty or by way of punishment. Factors to be considered in awarding exemplary damages, if ifany, any, are- a. The nature of the wrong. b. The character of the conduct involved. involved. c. The degree of culpability of Campbell Burgess. d. The situation and sensibilities of the parties concerned. e. The extent to which such conduct offends a public sense of justice and propriety. propriety. f. The net worth of Campbell Burgess. Answer: $,_ _ _ _ __ _ CHARGE TO THE JURY PAGE 23 OF 30 PAGE23 Appendix p. 28 250 251251251251251 QUESTION NO. 16: 16: Answer the following Question only only if you have answered "yes" 9. ''yes" to Questions 2 or 9. C . C. Burgess part of a conspiracy to wrongfully deprive Mikkelsen of his Was C. hi s preferred 8ancorp? shares in Herring Bancorp? To be part of a conspiracy. conspiracy, C. C. Burgess and another person or persons must have had knowledge of. co urse of action that resulted in of, agreed to, and intended a common objective or course damages to Mikkelsen. One or more persons involved in the conspiracy must have performed perfonned some act or acts to further the conspiracy. Answer "yes" ''yes" or "no." " no ." Answer: Answer: -~AA'---"~'--------- _--L ",~,,--_______ ./,·/ . CHARGE TO THE JURY PAGE 24 OF 30 Appendix p. 29 251 252252252252252 QUESTION NO. 17: Answer the following Question only if you had answered "yes" to Questions 3 or 10. Was Campbell Burgess part of a conspiracy to wrongfully deprive Mikkelsen of his preferred shares in Herring Bancorp? To be part of a conspiracy, conspiracy. Campbell Burgess and another person or persons must have had knowledge of, agreed to, and intended a common objective or course of action that resulted in damages to Mikkelsen. One or more persons involved in the conspiracy must have performed some Answer: Answer: IJa l}tJ TQ THE JURY CHARGE TO PAGE 25 OF 30 Appendix p. 30 252 253253253253253 OUESTION QUESTION NO. 18: NO. 18: What sum of money, if any, if paid now in cash, would fairly and reasonably compensate Mikkelsen for his damages, if any, that were proximately caused by such conspiracy? Consider the following elements of damages, if any. any, and none other: The lost dividend income on Mikkelsen's preferred shares from November 21, 2 1, 2006 until January 26, 2015. Answer: $_ _ _ __ _ _ Answer: - - -- - - - CHARGE TO THE JURY PAGE 26 OF 30 PAGE260F30 Appendix p. 31 253 254254254254254 OUESTION 19: QUESTION NO. 19: ta Question No. Answer the following question only if you unanimously answered "yes" to No. 16. Otherwise, do not answer the following question. question. To answer "Yes" to the following question, your answer must be unanimous. You may answer "No" to the following question only upon a vote often of ten or more jurors. Otherwise, you must yOll find by clear and convincing evidence that the harm to Mikkelsen resulted from Do you "Clear and convincing evidence" means the measure or degree ofproofthat produces a firm frrm beUefor belief or conviction of the truth of the allegations sought to be established. ""Malice" C.C. Burgess to cause substantial injury or hann Malice" means a specific intent by C.C. harm to Answer: _ _ __ _ __ _ CHARGE TO THE JURY PAGE 27 OF 30 Appendix p. 32 254 255255255255255 OUESTION NO. 20: QUESTION Answer the following question only ifyou unanimously answered "yes" to Question No. 17. "yesUta To answer "Yes" to the following question, your answer must be unanimous. You may often answer "No" to the following question only upon a vote of ten or more jurors. Otherwise, you must Do you find by clear and convincing evidence that the harm to Mikkelsen resulted from "Clear and convincing evidence" means the measure or degree ofproofthat produces a firm belief or conviction of the truth of the allegations sought to be established established.. "Malice" means a specific intent by Campbell Burgess to cause substantial injury or harm Answer "yes" or " no." no. " CHARGE TO THE JURY PAGE 28 OF30 OF 30 Appendix p. 33 255 256256256256256 QUESTION NO. 21: Answer the following question only ifyou unanimously answered "yes" to Question No. 19. "yes"la You must unanimously agree on the amount of any award of exemplary damages. What sum of money, if any, paid now in cash, should be assessed against C. C. Burgess and if any, for the conduct found in response to Question awarded to Mikkelsen as exemplary damages, ifany, 16? "Exemplary damages" means an amount that you may in your discretion award as a penalty or by way of punishment. Factors to be considered in awarding exemplary damages, if ifany, any, are-- a. The nature of the wrong. wrong. b. b. The character of afthe the conduct involved. c. The degree of culpability of ofC. C. C. Burgess. d. d. The situation and sensibilities of the parties concerned. e. The extent to which such conduct offends a public sense of justice and propriety. f. The net worth of C. C. Burgess. Answer: $,_ _ _ __ _ __ CHARGE TO THE JURY PAGE 29 OF 30 PAGE290F30 Appendix p. 34 256 257257257257257 OUESTION NO. 22: QUESTION Answer the following question only if you unanimously answered "yes" to Question No. 20. You must unanimously agree on the amount of any award of exemplary damages. money. if any, paid now in cash, should be assessed against Campbell Burgess What sum ofmoney, and awarded to Mikkelsen as exemplary damages, if any, for the conduct found in response to Question 17? 17? "Exemplary damages" means an amount that you may in your discretion award as a penalty or by way of punishment. Factors to be considered in awarding exemplary damages, if any, are- a. The nature of the wrong. b. The character of the conduct involved. c. The degree of culpability of Campbell Burgess. d. The situation and sensibilities of the parties concerned. e. The extent to which such conduct offends a public sense of justice and propriety. f. The net worth of Campbell Burgess. Answer in dollars and cents. cents, if any. Answer: $_ _ _ _ _ _ __ CHARGE TO THE JURY PAGE 30 OF 30 Appendix p. 35 257 258258258258258 JUROR CERTIFICATE We, the jury, jul)'. havef answered the above and foregoing questions as herein indicated, and herewith return same into court as our verdict. (To be signed by the presiding juror if unanimous.) '/ ~~~did75&n/ -PRES G JUROR (To be signed by those rendering the verdict if not unanimous.) ifnot Appendix p. 36 258 FILED The~day of D ~ 20 ll4- -\' The..B_day U:.20 4- At \h,· ~ o'clock_A_M: t>- 1l <> o'clock~M: o'clock Brenda Peterson CAUSE NO. 24,955 By~~Crr:;;;L~ .~\....) Deputy JOHN MIKKELSEN, § fN IN THE DISTRICT DfSTRICT COURT acting solely in his capacity as Trustee § of the John Mikkelsen Trust, § § Plaintiff, § § v. § WILBARGER COUNTY, TEXAS WILBARGERCOUNTY, § HERRING BANCORP, INC.; § C.c. BURGESS; and C.C. § C. CAMPBELL BURGESS, § § Defendants. § 46TH JUDICIAL JUDfCIAL DISTRICT DfSTRICT PLAINTIFF'S MOTION TO COMPEL TO THE HONORABLE DAN MIKE BIRD, DISTRICT DfSTRICT JUDGE: COMES ·NOW NOW John Mikkelsen, acting solely in his capacity as Trustee of the John Mikkelse~ Mikkelsen Trust~ Trust, Plaintiff, and respectfully files this Motion to Compel, and for such would show:· show: I. Overview . ... ·.Pl~intiff •Plaintiff reluctantly files this Motion to require the production of highly relevant . documents regarding Defendants' net worth, as expressly authorized by Texas law. II. Net Worth Documents On May 21, 2014, Plaintiff served his Third Request for Production of Documents to Defendants, to which Defendants responded on June 20, 2014. The requests (and Defendants' identical boilerplate boileri)Iate objections) were the following: PLAINTIFF'S MOTION TO COMPEL Page 1 Appendix p. 37 86 REQUEST FOR PRODUCTION NO. l: 1: .. ·. All finandal financial statements provided by C. C. Burgess to any person within the past five (5) years. OBJECTION: Defendants object to this request to the extent that the documents sought are neither relevant nor material to any issue to be decided by the trier of fact nor are the documents sought reasonably calculated to lead to the discovery of admissible evidence. TEX. R. C1v.CIV. P. 192.J(a). 192.3(a). Defendants further object to the extent that the documents sought are proprietary in nature and confidential and are not otherwise subject to disclosure and/or discovery. In addition, Defendants object to the extent that unless and until Plaintiff obtains a fact finding from the trier of fact which would entitle Plaintiff to offer and/or introduce evidence of such matters. Defendants state that any obligation on the part of Defendants to respond to and/or produce documents in connection with this request prior to such a fact finding from the trier of fact is premature, unnecessary and an unreasonable invasion of Ddendants are entitled ·to Defendants' proprietary and/or privacy rights. Defendants to and hereby move for a Protective Order so as to eliminate and/or minimize unnecessary harassment and/or invasion of Defendants' property rights with respect to the <;onfidential 'infonnation sought by this request and to the extent that the confidential financial ·information Court Orders production of such private, proprietary and/or confidential documents, that such documents be submitted for in camera inspection by the Court and further Orders circumscribing delivery, use, reproduction and/or dissemination of such documents by Plaintiff. ·. . . REQUEST REQUEST FOR PRODUCTION NO. 2: NO.2: . All financial statements provided by C. Campbell Burgess to any person within the past five (5) years. OBJECTION: Defendants object to this request to the extent that the documents sought are neither relevant nor material to ·any 'any issue to be decided ..by by the trier of . fact nor are the documents sought reasonably calculated to lead to the discovery of admissible evidence. T EX. R. CJV.CIV. P. 192.3(a). Defendants further object to the extent that the documents sought are propriet.ary in nature and confidential and are not otherwise subject to disclosure. disclosure. and/or discovery. In addition, Defendants.object Defendantsobject to the extent that unless and until Plaintiff obtains a fact finding from the trier of fact which would entitle Plaintiff to offer and/or introduce evidence of such matters. matters. Defendants state that any obligation on the part of Defendants to respond to and/or produce documents in connection with this request prior to such a fact finding from the trier trier. of fact is premature, unnecessary and an unreasonable invasion of Defendants' proprietary and/or privacy rights. Defendants are entitled to and hereby move for a Protective Order so as to eliminate and/or minimize unnecessary harassment and/or invasion of Defendants' property rights with respect to the confidential financial information infonnation sought by this request ·and and to the extent that the Court Orders production of such private, proprietary and/or confidential PLAINTIFF'S MOTION TO COMl'EL COMPEL Page 2 Page2 Appendix p. 38 87 - -~-. --"',-'---- .. documents, that such documents be submitted for in camera inspection by the Court docilments, delivery, use, reproduction and/or dissemination and further Orders circumscribing delivery; of such documents by Plaintiff. REQUEST FOR PRODUCTION NO. 3: NO.3: If you object to Request for Production No. l1 or claim such documents do not exist, any other documents which wou!d would reflect retlect the net worth of C. C. Burgess at all times from 2006 to the present date. OBJF,CTlQN: Defendants object to this request to OBJECTION: (0 the extent that the documents sought are neither relevant nor material to any issue to be decided by the trier of fact nor are the documents sought reasonably calculated to lead to the discovery of admissible evidence. TEX. R. C1v: eiV. P. 192..3(a). Defendants further object to the extent that the documents [;Ought sought urn prcprielary in Mture are prcprietary niJture and confidential and are not otherwise subject to disdo.:mre disdo,ure and/or discc.very. discGvery. :!·1 en adli.ition, addition, Defendants object to the extent that un~css and until Plai1~tiff lln!ess <.md f~.ct finding from the trier of PlaiJ,tiff obtains ''.'.1 fo.ct fact which would entitle Pjaintiff to offer an "RODUCTION NO. REQUEST FOR PRODUCTION 4: NO.4: . If you object to Request for Production No. !: or daim claim such documents do not exist, any other doc:umcnts documents which would woule! re.fleet the net worth of C. Campbell reBect Ih'" Burgess at ali times from 2006 200n to the present date. · OBJECTION: Defendants object to this requ~sl'to request to the extent that the documents sought are neither rel<:.vant relevant nor material to any issue t0 to be decided by the trier of fact nor are the documents sought reasonably cakuhted cakul'lted to lead to the discovery of I admissi~le evidence. TEX. R. Crv. P. 192.3(a). Defendants further object to the admissible I· extent that the documents sought are proprietary in nature and confidential and are not otherwise su~_ject subject to disclosure. disclosure, andlordiscovery. and/ordiscovery. ln In addition, Defendants object Plaintiff ohtains a fact finding from the trier of to the extent that unless and until Plainiiff Plainliffto fact which would entitle Plain.t]ff ilitroduce.evidence of such matters. to offer and/or ititroduce,ev.idence th~ part Defendants state. that any obligation on the ofDe.f:;ndants to respond to and/or partofDd:;ndants produce document~ cOllnection with this req·m~st documents in connection reqm:st prior to such a fact finding tinding from PLAINTffl'''S PLAINTIH'S MOTION TO CO;\'IPEL COMPEL Page 3 Page3 Appendix p. 39 88 ~~~"-~"" .-;.. '"'- ." ..• the trier of fact is premature, uiui~cess~y unrieccss';;'y··-- arid and 'an ., an .,unreaSonable unrea.Sonable invasion of Defendants' proprietary and/or privac/i·ights.. privacy '!·ighls. oe"rendants De'fendants are arc entitled to and hereby move for a Protective Order so·as to .eliminate and/or minimize unnecessary soastoeliminate harassment and/or invasion of Defendants' .,property property. rights with respect to the infornlation sought by this request and to the extent that the confidential financial information Court Orders production of such private, proprietary and/or confidential documents, that such documents be submitted for in camera inspection by the Court and further Orders circumscribing delivery, use, reproduction and/or dissemination of such documents by Plaintiff. REQUEST REOUEST FOR PRODUCTION NO. 5: NO.5: If you object to Requests for Production produition No. lI and No. No.22 or claim such 1ederal im'.orne documents do not exist, please produce fodernl im.eme ta'-: ta': returns for C. C. Burgess for the years 2006 to the present. OBJECTION: Defondants Defendants object to this rec1 ~':'st t:J rhisreCjh':'st (') the extent that the tile documents sought are neither relevant nor material to any iss1.1e issl.lc to be decided by the trier of fact nor are the documents sought reasonably calculated calc.ulated to lead to the discovery of admissible evidence. TEX. R. C1v. CIV. P. 192.3(a). Defendants further object to the extent that the documents sought are proprietary in nature and confidential and are not otherwise subject to disclosure and/or discovery. In addition, Defendants object ~o· to the extent that unless and until Plaintiff obtains a fact· fact finding from the trier of fact which would entitle Plaintiffto offer otTer and/or introduce evidence of such matters. D~fendants Defendants state the part of Defendants to respond to and/or state that any obligation on .the p~oduce produce documents in connection with this request prior to such a fact finding from the, trier of fact is premature, unnecessary and an unreasonable invasion of the. Defendants' proprietary and/or. and/or, privacy rights. Defendants are entitled to and hereby move for a Protective Order so as to eliminate and/or minimize unnecessary harassment and/or invasion of Defendants' property rights with respect to the confidential financial information sought by this request and to the extent that tilat the tile Court Orders production of such private, proprietary and/or confidential documents, that such documents be submitted for in camera inspection by the Court and further Orders circumscribing delivery, use, reproduction and/or dissemination of such documents by Plaintiff. REQUEST REOUEST FOR PRODUCTION NO. 6: NO.6: 1f If you object to Requests for Production No. I and No. 2 or claim such Campbell documents do not exist, please produce federal income tax returns for C. Ca.tnpbell tile years 2006 to the present. Burgess for the OBJECTION: Defendants object to this request to the extent that the documents docum,ents sought are neither relevant nor material to any issue to be decided by the trier of fact nor are the documents sought reasonably calculated to lead to the discovery of admissible evidence. TEX. R. Clv. CIv. P. 192.3(a). Defendants further object to the PLAINTIH'S MOTION TO COMPEL PLAINTWF'S Page 4 Page4 Appendix p. 40 I L__ 89 "" ."'; · ·- -.~ .. extent that the documents sought are proprietary in nature and confidential and are not otherwise subject to disclosure and/or discovery. In addition, Defendants object to the extent that unless and until Plaintiff obtains a fact finding from the trier of fact which would entitle Plaintiff to offer and/or introduce evidence of such matters. Defendants state that any obligation on the part of Defendants to respond to and/or produce documents in connection with this request prior to such a fact finding from ·produce the trier of fact is premature, unnecessary and an unreasonable invasion of Defendants' proprietary and/or privacy rights. Defendants are entitled to and hereby move for a Protective Order so as to eliminate and/or minimize unnecessary harassment and/or invasion of Defendants' property rights with respect to the infonnation sought by this request and to the extent that the confidential financial information Court Orders production of such private, proprietary and/or confidential documents, that such documents be submitted for in camera inspection by the Court and further Orders circumscribing delivery, use. reproduction and/or dissemination of such documents by Plaintiff. REQUEST REOUEST FOR PRODUCTION NO. 7: NO.7: Documents reflecting any transfer of assets by you at any time from 2006 the present for other than equivalent value, including assets transferred to fund to .the any trusts or similar arrangement, together with a copy of the trust instrument or other agreement evidencing any such transfer. . · OBJECTION: Defendants object to this request to the extent that the documents are neither relevant nor material to sought are.neither to any issue to be decided by the trier of fact nor are the documents sought reasonably calculated to lead to the discovery of admissible evidence. TEX. R. CJv. P. 192.3(a). Defendants further object to the adm1ssible extent that the documents sought are proprietary in nature and confidential and are not otherwise subject to disclosure and/or discovery. In addition, Defendants object trier of hie! finding from the tiier to the extent that unless and until Plaintiff obtains a fact Plaintiffto fact which would entitle Plaintiff to offer and/or introduce evidence of such matters. Defendants state that any obligation on the part of Defendants to respond to and/or produce documents in connection with this request prior to such a fact finding from unnecessary and an unreasonable invasion of the trier of fact is premature, urmecessary Defend,mts are entitled to and Defendants' proprietary andior privacy rights. Defendants hereby move for a Protective Order so as to eliminate and/or minimize unnecessary hara~srrient harassment and/or invasion of Defendants' property rights with respect to the financial information confidential financiat" infonnation sought by this request and to the extent that the Court Orders production of such private, proprietary and/or confidential documents, that such documents be submitted for in camera inspection by the Court and further Orders circumscribing delivery, use, reproduction and/or dissemination Plaintiff. of such documents by Plaintiff As reflected by the foregoing Requests and responses, Defendants repeat the same }\s objection to each request. The documents requested in Requests for Production No. 1I through 7 PLAINTIFF'S MOTION TO COMPEL PageS Appendix p. 41 90 • ,.. ·n- • r . ..... -·- ·-··- ,. ... - · .. .. ~ .. ~ a:~e in· are in'the .custody .custody and controi of Defendants, who !Javer~fu~cd wbo have refu~cd to produce them on grounds that the items are not relevant or "subject to disclosure and/or and/()r discovery." discovery. " However, Texas law clearly makes these items discoverable. dis~.overable when punitive damages may be awarded." Jn "Net worth is relevant and disc.overable In re L.L.c., 3. Islamorada Fish Co. Texas, L.L.C., 19 S.W.3d 908, 912 (Tex. App.- Dallas 2010, no pet) 319 pet.) citing Morris, 7746 Lunsfordvv. Morris, Lunsford 46 S. W.2d 471 S.W.2d 471.. 4473 73 (Tex. 1988), disapproved ofon other grounds by Walker, 827 S.W.2d at 842; see also In re Arpin Am Am.. .Moving Sys Sys..., LLC, 4 J 6 S. W.3d 927, 929 (Tex. App.- Ll.C, 416 App.- Dallas 2013, 110 no pet.) peL) (Net WLVth WelrtO disc:)very di swvery pcrmissi when ;e~l biee WntOH permissibl r<,~1 parti~s parties in interest seek exemplary damages); see also In re Jacvbs, Jacobs. 300 S. \V.3d 35, S.Vv.3d .~(i (Tex. i\pp.---Houston :; 5 .~(j App.---Hollston [14th Dist.] 2009, no pet.); see also Miller v. O'Neill, 775 S.W.2d peL); S.W.2ct 56, 58 (Tex. App.--Houston (l [1 st Dist.] 1989). pilnitive and ex~mplary damages for breach of fiduciary duties, Plaintiffs Original Petition seeks punitive . . . oppre.ssion, and civil conspiracy. See Plaintiffs Original Petition, p. 8. The requested items are oppression, clearly relevant to the issue of exemplary damages and withholding production is improper. Contrary to Defendants' contention that Plaintiff must first obtain "a fact finding from the . . . . . . . . .. - trier of fact which would entitle Plaintiff Plainti ff to offer and/or introduce introduc:e evidence" of Defendants' nt:t net worth, Texas courts have consistently held that thot a pt!I'ty.does party .does not have to show the viability of an an exemplary ·damages c.onduct discovery regarding nt~t 'damages claim before being entitled to c:.onduct nN worth. See 746 S.W.2d at 473; see also .Ill ParkerBuickCo. Lunsford, 746S.W.2dat473;seealsoA1 TOlle],y, 788S.W.2d Parker Buid: Co. v. Tvz:chy, 788 S.W.2d 129, 131 (Tex, (Tex. App.- · J:Iouston [I st Dist.] 1990, ori~. Houston .[1st orig. proceeding} Def~ndants' objections that the requests procceding)..Thus, Defendants' at issue are premature and unnecessary are unfounded unfounded.. . WHEREFORE, PREMISES CONSIDERED, Plaintiff ·requests requests that the above and foregoing Motion be set for hearing, that npoh npoil hearing all of Defondants' Detendants' objections as aforesaid as . - ...: be overruled~ overruled, that Defendants be ordered tu fu.l!y respond to Plaintiffs fuE y resPJod Plaintiff's discovery requests, that Pi.A)NTW~'S Pi, AINTIFF'.'S MOTION TO COM!'EI COMl'E),, --_._- . Page 6 Appendix p. 42 91 .. .". ,-~ , ... .> -I. .- Plaintiff be.awarded be awarded his reasonable and necessary att9mey's attorney's foes fees incurred in filing this Motion, and for general relief. HARD WICKE, CHRISTIE, SCHELL, POPE, HARDWICKE, KELLY & RAY, L.L.P. Lee F. Christie State Bar No. 04237100 · Jj_£}1ris!j_~0J12opehardwicke.com ]j.<;'hris!L~((Ul2.opehardwicke.co1l1 Michncl Michnel L. Atchley State. State Bar No. 01397600 matchleyfr!{popehardv,ricke.com matchley(ii)popehardwicke.com 500 W. 7th 7th Street, Suite 600 Fort Worth, Texas 76102 Telephone No. (817) 332-3245 Facsimile No. (817) 877-4781 ATTORNEYS FOR PLAINTIFF . JOHN MIKKELSEN certifY that a copy of this document is being served on the following counsel oftecord, II certify as indicated below, on October2.~2014: asindicated October2.l.. , 2014: Mr. Cornell Curtis Mr. Tim Newsom . CORNELL D. CURTIS, P.C. LOVELL, LOVELL, NEWSOM & ISERN, L.L.P L.L.P.. 1716 Main Street 8th A 112 West gth venue, Suite 1000 Avenue, Vernon, TX 76384 Amarillo, TX 79101 (Via Facsimile) (Via Facsimile and E-Mail) 1---- ,.' Lee F. Christie P:\Mfkk:d~n\Pl¢ai..ling... t..\\fotM)11 10 Compel P:\Mikb:l~II\pl¢atlirl!>-~\\1(I[Km 10-2014 Net Wonh.doc~ Coml'c110-2014 Wonh.doc'{ PLAINTIFF'S MOTION TO COMPEL Page 7 Appendix p. 43 92 01/09/2015 12:58 .. 8178774781 POPE HARDWICKE PAGE 05/05 JOHN MIKKELSEN, ~ · § 46 tH DISTRICT COURT IN THE 46m acting solely in his capacity as Trustee § of the John Mikkelsen Trust, ' I § §"§ Plaintift7Counter-Defendant, PlaintifflCounter-Defendant, § § v. § IN AND FOR § HER.RING HERRING BANCORP, INC.; BANCORP,INC.; § C.C. BURGESS; and § C. CAMPBELL BURGESSt BURGESS, § § Defendants/Count~-Plaimiffs. DefendantsiCountt'l'-Plaimiffs. § WILBARGER COUNTY, TEXAS ORDER DENYING PLAINTIFF'S MOTION TO COMPEL 12th day of November, 2014, came on for hearing Plaintiff's Motion to Compel filed On the 12'" filed. herein on October 23, 2014. The Court, having duly considered the Motion, the response of Defendants, and the arguments of counsel, finds that the Plaintiff's Motion should be DENIED. IT IS SO ORDERED. SIGNED on the 20· 2.'0 day of )BJ)uery, January, 2015. HO~D~# HO~Db::if#7 4~ 46'" District Court Judge The~D-d~'~!~2·0;~' At I :l .. '-\, \) O'clocke_M: o'clock _ _ . Br~nda Peterson· • lerk Dis!. Court Wilbarger Co. '. P:\Mildc.elaen\Pieadin8B\Ordcr Dmyin1 P:\Mikke19eRIPleldil\gll\Ordu Dmyinll Pfs Pre Mo!ion Motion 10 to Compel.doc Compfll.doc Sy ~ . ,Deputy \ j ·ORDlJI ·ORDER SOLOP,\.G.E SOI,.OP"'C£ Appendix p. 44 93 55 Cause No. -,'J-",4-..!.L'q-'-"''' £'''J' ' '----_ __ JOHN MIKKELSEN, acting solely in § IN THE DISTRICT COURT ZGOO 20 I(): 23J bis capacity as Trustee of the his § ZGOB AUG 2 Q A IQ: 2 John Mikkelsen Trust, § § Plaintiff, § § v. § WILBARGER COUNTY, TEXAS § HERRING BANCORP, INC.; § c.c. C.c. BURGESS; and § C. CAMPBELL BURGESS, § § Defendants. § 46TH JUDICIAL DISTRICT PLAINTIFF'S ORIGINAL PETITION John Mikkelsen, acting solely in his capacity as Trustee of the John Mikkelsen Trust ("Plaintiff' or "Mikkelsen"), complains of Herring Bancorp, Inc., C.C. C.C. Burgess and Plan, as provided by Rule 190.3 of the Texas Rules of Civil Procedure. 2. Plaintiff John Mikkelsen is a resident of ofWilbarger Wilbarger County, Texas. 3. Defendant Herring Bancorp, Inc. is a Texas corporation with its principal place of business in Texas. It may be served with process by serving its registered agent, Sandra K. Webb, at 2201 Civic Circle, Amarillo, Texas 79109. PLAINTIFF'S PLAINTifF' S ORIGINAL PETITION PAGE II Appendix p. 45 5 66 4. Defendant C.C. Burgess is an individual Texas resident. He may be served with process at his usual place of business, 2201 Civic Circle, Amarillo, Texas 79109, or wherever else he may be found. 5. Defendant C. Campbell Burgess is an individual Texas resident. He may be served with process at his usual place of business, 2201 220 I Civic Circle, Amarillo, Texas 79109, or wherever else he may be found. found. 6. The Court has personal jurisdiction of all parties because they are all Texas residents. 7. The Court has subject-matter jurisdiction of this case because the amount in controversy exceeds the Court's minimum jurisdictional limit and because it is an action by aa trustee concerning a trust. 8. Venue is proper in Wilbarger County because all or a substantial part of the events giving rise to Plaintiffs claims occurred in this county. Specifically, Defendants took the actions described below against Plaintiff in Wilbarger County; the Will through which the stock at issue in this case was acquired was probated in Wilbarger County; and the stock certificates at issue in this case are located in Wilbarger County. Further, because this is an action by a Trustee who resides or has resided in Wilbarger County within the four-year period preceding the date this action is filed, filed, and because the situs of administration of the Trust is maintained in Wilbarger County, venue is mandatory in this County under Chapter 115 of the Texas Property Code. PLAINTIFF'S ORIGINAL PETIT PETITION ION PAGE2 PAGE 2 Appendix p. 46 6 77 9. This lawsuit arises from a course of action undertaken by, or at the direction of, Herring Bancorp, Inc. ("Herring"), C.C. C.C. Burgess and C. Campbell Burgess Herrring's Chairman and C. Campbell Burgess (collectively, "Burgess"). C.C. Burgess is Heming's has been its chief executive officer. Herring is the holding company for Herring Bank (the "Bank"), which has several branches in Amarillo and Vernon, Texas. Texas. 10. Mikkelsen and his wife's family have been associated with Herring Bank since its inception in 1903. Mikkelsen himself was associated with the Bank for more than 30 years, and served as Chairman of the Board for 13 I3 years, from 1985 to 1998. He succeeded his father-in-law, M.K. Berry, who was Chairman from 1939 to 1985 and was President of the Bank from about 1937 until about 1974. M.K. Berry's Berry' s father was W.D. W.o. Berry, who was one of the Bank's founding shareholders in 1903 and who served as Chairman of the Board from about 1921 until about 193 1939. 9. Bancorp' s preferred stock, including 150 shares acquired through his mother's Will and Bancorp's 150 shares assigned to him by his brother, Mallory Mikkelsen. 12. Burgess and members of his family have undertaken a course of conduct intended to eliminate the Mikkelsen family from further involvement in Herring or the Bank, and in doing so have violated (among other things) Herring's Articles of Incorporation. PLAINTIFF'S ORIGINAL PETITION PUINTIFF'SORIGINAL PAGE3 PACE 3 Appendix p. 47 7 88 13. As part of the Burgesses' plan, they decided to try to force Mikkelsen to surrender his preferred stock through an elaborate reorganization whereby Herring was supposedly converted from a C Corporation to an S Corporation and whereby certain, selected shares of preferred stock (i.e., Mikkelsen's shares) were purportedly redeemed. C.c. Burgess tried to justify C.C. justifY the selective redemption by claiming that, since the company was converting to an S Corporation, it was only permitted to have one class of stock and no more than I100 shareholders. Therefore, according to C.C. Burgess, many of the 00 shareholders. preferred shareholders were permitted to have their preferred shares redeemed and exchanged for common stock, but the company elected not to give Mikkelsen that option and instead decided instead to redeem redeem his shares for cash. 14. C.C. Burgess (purportedly on behalf of Herring) sent Mikkelsen a "Notice C.C. of Redemption" on or about October 31, 31 , 2006 (a copy of which is attached as Exhibit "A"), which states in pertinent part: This letter is intended to notify notifY you that the board of directors (the "Board") of Herring Bancorp, Inc. (the "Company") has called for the redemption (the "Redemption") of your outstanding shares of Preferred Stock (the "Preferred Stock") of the Company on November 20, 2006 2006.. ••• *** As a result of this process, the Board appointed a committee to recommend the criteria for determining which Preferred Stock shareholders would be offered to exchange their shares for the Company's common stock (the "Common Stock"), the nonvoting Common Stock-Series A (the "Common Stock- Series A"), or to have their shares redeemed. redeemed. The Board's criteria for making this determination included whether the Preferred Stock shareholder had a banking relationship with Herring Bank (the "Bank"), and whether they would own at conversion. If least 50 shares of Common Stock upon the conversion. these criteria were met, the Board offered the Preferred Stock PLAINTIFF'S ORIGINAL ORIC INAL PETITION PAGE4 Appendix p. 48 8 99 shareholders the option to exchange their shares for the Common Stock. If the Preferred Stock shareholders did not meet these criteria, the Board determined the Preferred Stock shareholders would be redeemed. redeemed . ••• *** From our conversations with you and the Board's determination regarding our classes of stock, your Preferred detennination Stock will be redeemed. redeemed. 15. Thus, Defendants' own Notice of Redemption draws a distinction among the preferred shareholders and admits that only some of the preferred shares were being redeemed for cash. Defendants also admit in the Notice of Redemption that the procedure detennining which of the preferred shares to redeem for cash did not involve a for determining drawing by lot or any pro rata redemption. 16. The redemption process Defendants undertook, as explained in their own Notice of Redemption, violates the procedure required by Herring's Articles of Incorporation: Incorporation: 5. Redemption. a. Preferred Stock. The Corporation, at the option of the Board of Directors, may at any time redeem the whole, or from time to time redeem any part, of the Preferred Stock outstanding by paying cash therefor the sum of $95 per share, plus all dividends declared but unpaid thereon .... . . .. ••• *** Should only a part of the outstanding Preferred Stock be redeemed, the redemption will be effected by lot or pro rata, as prescribed by the Board of Directors. 17. Since only some shares of the company's preferred stock were redeemed, and since the purported redemption was not effected by lot or pro rata, the procedure PLAINTIFF' PLAINTIFF'SS ORIGINAL PETITION PAGES Appendix p. 49 9 1010 violated the plain language of Herring's Articles of Incorporation, a copy of the relevant portions of which is attached hereto as Exhibit ""B." B." 18. Because of the invalidity of the redemption procedure, Mikkelsen declined the Defendants' offer of redemption. Defendants did not have the authority to redeem shares in violation of the company's Articles, and the purported redemption is therefore void. 19. Notwithstanding the fact that the purported redemption is void, Mikkelsen has not received dividends on his preferred shares, has been denied access to the company's books and records, and has generally been treated as if he is no longer a shareholder. v. V. CAUSES OF ACTION COUNT ONE BREACH OF CONTRACT 20. The Articles of Incorporation of Herring constitute a contract between Herring and its shareholders. As a preferred shareholder of Herring at all relevant times, Plaintiff is entitled to the benefits of that contract. The acts and omissions of Defendants afthat as described hereinabove constitute a breach of that contract, entitling Plaintiff to recover all of his damage and loss proximately resulting therefrom. 21. Plaintiff further seeks recovery of his reasonable and necessary attorney's fees for breach of contract pursuant to Chapter 38 of the Texas Civil Practice and Remedies Code. PLAINTIFF'S ORIGINAL PETITION PAGE6 Appendix p. 50 10 1111 COUNT Two TWO RIGHTS INSPECTION RIGHTS 22. Mikkelsen further sues Defendants for their wrongful violation of his statutory rights of inspection under TEX. Bus. CORP. ACT Art. Art. 2.44(C), which provides a corporate shareholder with a statutory right to inspect and make extracts from corporate records. records. Mikkelsen seeks an appropriate order, including, if jf necessary, a writ of mandamus, compelling Defendants to provide access to and copies of Herring's corporate records. COUNT THREE BREACH OF FIDUCIARY DUTY, CIVIL CONSPIRACY, AND UNLAWFUL OPPRESSION OF MINORITY SHAREHOLDER 23. Mikkelsen further sues Defendants for the fraudulent and disloyal acts they have directed toward him. Defendants violated the plain terms of Herring's Articles of Incorporation, breached their fiduciary duties, and misrepresented facts by attempting to selectively redeem Mikkelsen's preferred shares in a manner not authorized by the company' s Articles of Incorporation, without notice to all the preferred shareholders, and company's without notice that the company's board of directors and its secret committee were engaged in an insider transaction. transaction. Defendants breached their fiduciary duties when they voted on and conducted the purported redemption through secret meetings with hidden procedures. 24. Defendants also made material false representations to Mikkelsen concerning the attempted selective redemption, the motives and procedures of the secret PUENTIH'S PLACNTIFF'S ORIGINAL PETITION PAGE7 PAGE 7 Appendix p. 51 11 1212 committee that authorized and conducted the purported redemption, and the self-dealing and differing treatment within the class of preferred shareholders. 25. The foregoing course of action was part of a general pattern of oppression of Mikkelsen as a minority shareholder, and clearly the product of a civil conspiracy between and among Herring and Burgess to accomplish an illegal result, the deprivation or impairment of Mikkelsen's vested property rights, and the violation of Herring's Articles of Incorporation. Plaintiff has been damaged by this conduct, and hereby sues to recover those damages. 26. 26. Mikkelsen's damages include, at a minimum, the dividends due to him as a preferred shareholder since October 31, 2006, his attorney's fees and expenses required to be incurred as a result of Defendants' improper conduct; and capital gains taxes if the alleged redemptions are required to be reported as such. PRAYER WHEREFORE, PREMISES CONSIDERED, Mikkelsen respectfully respe:ctfully requests the Court to cite Defendants to appear and answer and, on final trial, trial , award Mikkelsen relief against Defendants, jointly and severally, as follows: (I) An appropriate order compelling Defendants to immediately provide Plaintiff with the right to inspect all requested records of Herring; (2) Actual damages; (3) Punitive and exemplary damages for breach of fiduciary duties, oppression, and civil conspiracy as pled above; above; (4) Attorney's fees and court costs; (5) Prejudgment interest and post-judgment interest at the highest lawful rates; PLAINTIFF'S ORIGINAL PETITION PAGES Appendix p. 52 12 1313 (6) (6) All writs and processes necessary to effectuate the relief requested; and Attorney's fees and costs of court; and (7) All other relief Plaintiff Mikkelsen is entitled to receive. Respectfully submitted, POPE, HARDWICKE, CH CH~~~J SCHELL, KELLY & RAY~, RAY, ,,.'-'<.F __...... ., By: Lee F. Chri ii State Bar No . ~0:4:23~1~7~0~0~---- NO.~ 0~4~ 23:'1~7~00~_ _ _ _--- Michael L. A hley State Bar No. 01397 00 306 West 7th Street, Suite 90 9011 Fort Worth, Texas 76102-4995 (817) 332-3245 (Telephone) (817) (8 17) 877-4781 877-478 1 (Facsimile) Attorneys for Plaintiff PLAINTIFF'S PLAINTifF'S ORIGINAL PETITION PAGE9 PAGE 9 Appendix p. 53 13 1414 HERRING BANCORP, l:NC. INC. c. C. Burgess C. ChQi,.".."I>jIM Chairman of the Boani Boord Notice of Redemption 2201 Civic Circle, Suite 1001 Amarillo, TX 79109 October 31, 31 , 2006 P. 0. O. Box Box 9900 Amarillo, TX 79105-5900 Dear Preferred Stock Shareholder: (806) 373-3921 Phone (806) 372-8230 Fax This letter is to notify you that the board of directors (the "Board,,) "Board") ccburgess@)rerringbank.com ccburgess@jrerringbank.com of Herring Bancorp, Inc. (the "Company") has called for the redemption (the "Redemption") of your outstanding shares of Preferred Stock (the Stock") of the Company on November 20, 2006. "Preferred Stock,,) As you know on July 26, 2006, our Board approved taking the necessary acts for the Company to become an "S "s corporation" under the amended. In order to become eligible Internal Revenue Code of 1986, as amended. to make the Subchapter S election, the Company is only allowed to have one class of outstanding capital stock, and voting rights between shares of stock are disregarded for determining whether a company has more than one class of stock. At the current time, the Company has a number of outstanding classes of stock, which include your Preferred Stock shares, as welJ as Class A Nonvoting Common Stock, Class A-Series 2 Nonvoting well Common Stock, and Class B Nonvoting Common Stock (collectively, the Shares"). Therefore, we must currently consolidate our "Nonvoting Shares"). Nonvoting Shares into one class. The Class A Nonvoting Common Stock and the Class B Nonvoting Common Stock will be allowed to exchange their shares for Common Stock-Series A, and the Class A-Series 2 Nonvoting Common Stock will be converted into a subordinated debenture. As a result of this process, the Board appointed a committee to recommend the criteria for determining which Preferred Stock shareholders would be offered to exchange their shares for the Company's «Common Stock"), the nonvoting Common Stock- common stock (the "Common Series A (the "Common Stock-Series A,,) An) or to have their shares redeemed. The Board's criteria for making this determination included whether the Preferred Stock shareholder had a banking relationship with Batik (the "Bank"), and whether they would own at least 50 Herring Bank Stoc:k upon the conversion. If these criteria were met, shares of Common Stock the Board offered the Preferred Stock shareholders the option to exchange Stoc:k. If the Preferred Stock shareholder did their shares for the Common Stock. not meet these criteria, the Board determined the Preferred Stock shareholders would be redeemed. Additionally, if the Preferred Stock shareholder did not have a banking relationship with the Bank, we would offer them the option of either exchanging their shares for the nonvoting Common Stock-Series A or having their shares redeemed. From our Appendix p. 54 14 1515 conversations with you and the Board's determinations regarding our classes of stock, your Preferred Stock will be redeemed. The Redemption will take place after 5:00 p.m. on November 20, 2006 (the "Redemption Date"). The price to be paid for each share of Preferred Stock will be $95.00 per share, plus an amount equal to all dividends accrued and unpaid thereon, whether or not declared, pro rata to the date fixed for the redemption (the "Redemptive Price"). As a result of the Redemption, the Company will pay you $95.00, in cash, for the shares of Preferred Stock you hold that will be redeemed. redeemed Prior to or at the open of business after 5:00 p.m. on November 20, 20. 2006, the Company will deposit with Herring Banlc, Bank, Amarillo, Texas (hereinafter the "Transfer Agent"), as aa trust fund, an amount necessary to pay the aggregate Redemptive Price, together with irrevocable instructions and authority to the Transfer Agent to pay, on or after the Redemption Date, the Redemptive Price to the holders of the Preferred Stock upon the Transfer Agent's receipt of the duly surrendered certificates representing their Preferred Stock. As a result of the Company' s deposit of funds with the Transfer Agent, 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. In order to receive the Redemptive Price, you should deliver to the Transfer Agent the following: (i) a duly executed Letter of Transmittal, a copy of which is enclosed herewith, and (ii) the stock certificate(s) representing your shares of Preferred Stock. The address of the Transfer Agent is Herring Bank, P.O. Box 9900, Amarillo, Texas 79105. The telephone number of the Transfer Agent is (806) 355-0153. Please follow carefully the Instructions to the Letter of Transmittal when completing it. Assuming Asswning the Transfer Agent receives the applicable docwnents documents from you prior to the Redemption Date (and asswning assuming there is no problem with these documents), the Transfer Agent will hold them in escrow for you until the Redemption Date, at which time you willwin receive payment for your shares. The Company will pay the Redemptive Price by check of same day funds. Please refer to the Letter of Transmittal ce-rtificates provided herewith for further instructions on how to surrender certificates and receive delivery of the Redemptive Price. You may obtain additional copies of the Letter of Transmittal from the C-0mpany. Company. Also, if any of your Preferred Stock certificates have been lost, stolen or misplaced, or if any of your shares are pledged or encumbered, you will need to make additional arrangements in order to receive the Redemptive Price for your shares. Please contact the Transfer Agent for further details. Appendix p. 55 15 1616 Preferred Stock Shareholder October 31, 3 I, 2006 Page 3 Assuming that the Transfer Agent has received these documents from you on or before 5:00 p.m. on November 20, 2006 (and that there are no problems with your documents), documents). you will be able to receive payment for your yow shares on the Redemption Date. Date. You may pick up your check on the Re.demption Redemption Date at 220 I Civic Circle, Amarillo, Texas during regular business hours. Herring Bank, 2201 If you will not be available to pick up your check in person at that time, please contact the Transfer Agent so that you can arrange an alternate method of delivery of the Redemptive Price for your Preferred Stock. If you do not pick up your check on the Redemption Date or contact the Transfer Agent to make other arrangements, the Transfer Agent will mail your check to you at the close of business on the Redemption Date. If your documents are not in order so that your check is not available on the Redemption Date, your check will be mailed to you as soon as possible after your documents are received and approved. Please remember that the Redemption of your Preferred Stock may be a taxable transaction for federal income tax purposes. pwposes. There also may be state, local or foreign income or other tax consequences to the Redemption. You should consult your own tax advisor to determine detennine the precise tax consequences of this transaction. transaction. If [f you should have any questions in connection with any aspect of this letter, please feel free to call C.C. Burgess at (806) 373-3921. 373-3921 . Very truly yours, HERRING BANCORP, INC. e~~ ~~~ C.C. C. C. Burgess Chairman of the Board Appendix p. 56 16 1717 forth above are not completely earned through to che set fonh the new company will not nor be considered consIdered a hqutdation hqUidation for the purposes of the liqUidation llqutdatton preferences set fonh above. a. Preferred Stock. The Corporation, Corporauon. at the option of the Board of Directors, lime redeem the whole, or from ume may at any ume time to time redeem any part. part, of the Preferred Stock outstanding by paymg in cash therefor the sum of $95 per share. outstandmg share, plus all d1v1dends diVidends declared but unpaid thereon as provided in unpard thiS An1cle In this ArtIcle Four to and mcludmg the date of redemption, hereinafter referred to as the "redempuve pnce, " and by giving -redempuve price," gIVing to each Preferred Stock SlOck shareholder of record at that Preferred Stock shareholder's last known address. as shown on the CorporatIOn, at least 20. records of the Corporation. 20, but not more than 50.50, days' prior pnor nouce personally or m wmmg, by mail, In wrmng, mall , postage prepaid, prepaId, statmg stating the class or series or part of the class or senes of shares to be redeemed and the date dale and plan of redemption. redemption, the redemptive pnce.pnce, and the place where the shareholder can obtam payment of the redemptive price on surrender of their respeclIve share certificates, hereinafter called the "redemption respecuve "redemptIOn notice. nottce."" Should only a part of (I the outstanding Preferred Stock be redeemed, redeemed , the redemption will be effected by lot or pro rata, rata, [l as preSCribed prescribed by the Board of Directors. On or after the date fixed for redemption. redemptton, each holder (I redemptlon will surrender his of shares called for redemption hiS or her certificate for the shares to the Corporation at the place designated deSignated m In the redemption nouce and Will will thereupon be entitled to receIve receive payment of the redemptive price. Should less than all the shares represented by any surrendered certificate be redeemed, a new certificate for the unredeemed shares will be issued. ISSUed. If the redemption notice 1s IS duly given and if suffiCient sufficient funds are available on the date fixed for • 1 redemption, then, redempuon, then , whether or not the certificates ev1dencmg surrendered, all nghts with eVidencing the shares to be redeemed are With respect to the shares will terminate termmate on the date fixed for redemption, redemption. o , (, except for the nght of the holders to receive the redempuon redemption price. price, without mterest, Interest, on surrender :l of their certificate If, on or pnor to any date fixed for redemption of Preferred Stock as herein herem provided prOVided , the Corporation deposits with any bank or trust company in m Texas or any bank or trust company Umted States duly appoint m the United app0lntmg acting mg and act mg as transfer agent for the Corporation as a trust suffiCient fund, a sum sufficient to redeem. redeem, on the date thereof. the shares called for fixed for redemption thereof, redemption, with mevocable Irrevocable instructions IOstructlons and authority to the bank or trust company to publish the nouce notice of redemption thereof, or to complete the pubhcatton publication 1f If theretofore commenced. and to pay, on and after afrer the date fixed for redemption or prior thereto, the redemptive price of the shares to their respective holders on surrender of their share certificates, certtficates, then from and after the date of the deposit, deposit , even though that date may be pnor prior to the date fixed for redemption, the WIll be deemed to be redeemed; shares so called will redeemed ; and d1v1dends diVidends on those [hose shares will cease to accrue after the date fixed for redemptlon depOSit Will redemption The deposit w1JI be deemed to consurute constitute full deposll, the shares will payment of the shares to their holders; and from and after the date of the deposrt, be deemed co ro be no longer outstandmg; and the holders thereof will WIll cease to [0 be shareholders wllh respect to the shares and will wnh Will have no rights nghts with respect thereto, except the nght to receive bank. or trust company payment of the redempttve from the bank redemptIve pnce price of the shares, WIthout Interest, without interest, [heIr certtficares on surrender of their certIficates l, i!2640Zl. \IPS 226402.3 . llP5 Appendix p. 57 17 153153153153153 FILED The \\u\..., day of ':J~~ °'-<""'\ 20 20\5\5 At 3·.oD o'clock~M:o'ciock 0 1 1 clock*-M:o clock Brenda Peterson Cause No. 24,955 Court VV::ge~ Co. perk .Dist. Court~ '", plerk,Dist. By"--UL-\..LL.U~ By~~ JOHN MIKKELSEN, acting solely in § IN THE DISTRICT COURT Deputy his capacity as Trustee of the § John Mikkelsen Trust, § § Plaintiff, § § v. § WILBARGER COUNTY, TEXAS § HERRING BANCORP, INC.; § c.c. C.C. BURGESS; and § C. CAMPBELL BURGESS, § § Defendants. § 46TH JUDICIAL DISTRICT PLAINTIFF'S F'IRST AMENDED 0RIGlNAL ORIGINAL PETITION John Mikkelsen, acting solely in his capacity as Trustee of the John Mikkelsen Trust "Mikkelsen"), complains of Herring Bancorp, Inc., C.C. Burgess and C. Campbell ("Plaintiff' or '"Mikkelsen"), Burgess, and for cause of action shows as follows: 1. l. Plaintiff intends to conduct discovery under a Level 3 Discovery Control Plan, as provided by Rule 190.3 of ofthe the Texas Rules of Civil Procedure. 2. Plaintiff John Mikkelsen is a resident of ofWilbarger Wilbarger County, Texas. 3. Defendant Herring Bancorp, Inc. is a Texas corporation with its principal place of business in Texas and has appeared and answered herein. 4. Defendant C.C. Burgess is an individual Texas resident and has appeared and answered herein. PLAINTIFF'S FIRST AMENDED ORIGJ]' 153 154154154154154 5. Defendant C. Campbell Burgess is an individual Texas resident and has appeared and answered herein. 6. The Court has personal jurisdiction of all parties because they are all Texas 7. The Court has subject-matter jurisdiction of this case because the amount in controversy exceeds the Court's minimum jurisdictional limit and because it is an action by a trustee concerning a trust. 8. Venue is proper in Wilbarger County because all or a substantial part of the events giving rise to Plaintiff's claims occurred in this county. Specifically, Defendants took the actions described below against Plaintiff in Wilbarger County; the Will through which the stock at issue in this case was acquired was probated in Wilbarger County; and the stock certificates at issue in this case are located in Wilbarger County. Further, because this is an action by a Trustee who resides or has resided in Wilbarger County within the four-year period preceding the date this action was filed, and because the situs of administration of the Trust is maintained in Wilbarger County, venue is mandatory in this County under Chapter 115 of the Texas Property Code. 9. This lawsuit arises from a course of action undertaken by, or at the direction of, Herring Bancorp, Inc. ("Herring"), C.C. Burgess and C. Campbell Burgess (collectively, "Burgess"). C.C. Burgess is Heming's Chairman and C. Campbell Burgess has been its chief executive officer. Herring is the holding company for Herring Bank (the "Bank"), which has several branches in Amarillo and Vernon, Texas. PLAINTIFF'S FIRST AMENDED ORIGINAL PETITION PAGE2 PAGE 2 Appendix p. 59 154 155155155155155 10. Mikkelsen and his wife's famiiy have been associated with Herring Bank since its inception in 1903. Mikkelsen himself was associated with the Bank for more than 30 years, and served as Chairman of the Board for 13 years, from 1985 to 1998. He succeeded his father-in- law, M.K. Berry, who was Chairman from 1939 to 1985 and was President of the Bank from about 1937 until about 1974. M.K. Berry's father was W.D. Berry, who was one of the Bank's founding shareholders in 1903 and who served as Chairman of the Board from about 1921 until about 1939. 11. II. Among his many ties to the Dank, Mikkelsen owns 300 shares of Herring Bancorp's preferred stock, including 150 shares ISO sharcs acquired through his mother's Will and 150 shares assigned to him by his brother, Mallory Mikkc1sen. Mikkelsen. 12. Burgess and members of his family have undertaken a course of conduct intended to eliminate the Mikkelsen family from further involvement in Herring or the Bank, and in doing so have violated (among other things) Herring's Articles of Incorporation. 13. As part of the Burgesses' plan, they decided to try to force Mikkelsen to surrender his preferred stock through an elaborate rnorganization reorganization whereby Herring was supposedly converted from a C Corporation to an S Corporation and whereby certain, selected shareholders of preferred stock (i.e., Mikkelsen's shares) were purportedly redeemed. C.C. Burgess tried to justify the selective redemption by claiming that, since the company was converting to an S Corporation, it was only permitted to have one class of stock and no more than 100 shareholders. Therefore, according to C.C. Burgess, many of the preferred shareholders were permitted to have their preferred shares redeemed and exchanged for common stock, but the company elected not to give Mikkelsen that option and instead decided instead to redeem his shares for cash. ORIGl~AL PElll PLAINTIFF'S FIRST AMENDED ORIGlI\;AL Pt:Tn ION PAGE3 PAGE 3 Appendix p. 60 155 156156156156156 14. C.C. Burgess (purportedly (purpurtedly on behalf of Herring) sent Mikkelsen a "Notice of Redemption" 31,, 2006 (a copy of which is attached as Exhibit "A"), which Redemption'' on or about October 31 states in pertinent part: This letter is to notify you that the board of directors (the "Board") of Herring Bancorp, Inc. (the "Company") has called for the redemption (the "'Redemption") "Redemption") of your outstanding shares of Preferred Stock (the ''Preferred "Preferred Stock") of the Company on November 20, 2006. 2006. As a result 0f I'f this process, the Board appointed a committee to recommend the criteria for lor determining whid1 whk h Preferred Stock shareholders would be cftered offered tGtc exchlJnge exchanue their shares for the ~- Company's common slOck stock (th1,;: (th.' "Common Stock"), the nonvoting Stock-Series A (the "Common Stock-Series Common Stoc.k-Series Stode-Series A''), A"), or to have their shares red~emed. rt>d<;emcd. The Board'~ criteria for making this determination included whcth. whethere r the Preferred Stock shareholder had a banking relationship with Herring Rank (the "Bank"), and whether they would own at least 50 shares of Common Stock upon the conversion. If these criteria were met, the Board offered the Preferred Stock shareholders the option to exchange their shares for the Common Stock. lf If the Preferred Stock shareholder did not meet these criteria, the Board determined the Preferred Stock shareholders wouJd would be redeemed. redeemed. *** From our conversations with you and the Board' Board'ss dctennination determination ;.tock. your Preferred regarding our classes of 5tock, Preterred Stock will be redeemed. redeemed. 15. Thus, Defendants' own own Notice of Redemption draws a distinction among the preferred shareholders and admits that only some of the preferred shareholders were being redeemed for cash. Defendants also admit in the Notice of Redemption that the procedure for determining detennining which of the preferred shares to .redeem redeem for cash did not involve a drawing by Jot lot or any pro rata redemption, and did not involve the redemption of shares but instead of shareholders. 16. Th.e redemption process Defendants undertook, as expJained The explained in their own Notice of Redemption, violates the tht: procedure required by Herring's Articles of ofincorporation: Incorporation: PLAINTIFF'S FIRST AMENDED ORIGINAl, ORIGINAi. PETITION PAGE4 PAGE 4 Appendix p. 61 156 157157157157157 5. Redemption. a. a. Preferred Stock. The Corporation, at the option of the Board of Directors, may at any time redeem the whole, or from part; of the Preferred Stock outstanding by time to time redeem any part, paying cash therefor the sum of $95 per share, plus all dividends .... declared but unpaid thereon .... ... *** Should only a part of the outstanding Preferred Stock be redeemed, the redemption will be effected by lot or pro rata, as prescribed by the Board of Directors. 17. Since only some shares of the company' company'ss preferred stock were redeemed, and since the purported redemption was not effected by lot or pro rata, the procedure violated the Herring' s Articles of plain language of Herring's oflncorporation, Incorporation, a copy of the relevant portions of which is attached hereto as Exhibit "B." "8." 18. I S. Because of the invalidity of the redemption procedure, Mikkelsen declined the Defendants' offer of redemption, informed Defendants that they were breaching the contractual Articles of Incorporation and demanded they comply. Defendants refused, even though Defendants did not have the authority to redeem shares in violation of the company' company'ss Articles, and the purported redemption is therefore void. void. 19. Notwithstanding the fact that the purported redemption is void, Mikkelsen has not company'ss books and received dividends on his preferred shares, has been denied access to the company' records, and has generally been treated as if he is no longer a shareholder. v. CAUSES OF ACTION COUNT ONE BREACH BREACH OF CONTRACT CONTRACf 20. The Articles of Incorporation of Herring constitute a contract between Herring and its shareholders. As a preferred shareholder of Herring at all relevant times, Plaintiff is PLAINTIFF' PLAINTIFF'SS FIRST FIRST AMENDED ORIGINAL ORIGINAL PETITION PAGES PAGE5 Appendix p. 62 157 158158158158158 entitled to the benefits of that contract. The acts and omissions of Defendants as described hereinabove constitute a breach of that contract, entitling Plaintiff to recover all of his damage and loss proximately resulting therefrom. 21. Plaintiff further seeks recovery of his reasonable and necessary attorney's fees for breach of contract pursuant to Chapter 38 of the Texas Civil Practice and Remedies Code. 22. All conditions precedent to the recovery of damages and attorney's fees have occurred or been performed. COURT TWO Two DECLARATORY JUDGMENT 23. Pursuant to Chapter 37 of the Texas Civil Practice & Remedies Code, Plaintiff requests that the Court construe the Articles of Incorporation of Herring and declare that the November 2006 purported redemption of Plaintiff's preferred shares was void, that the subsequent purported November 2013 redemption of Plaintiff's preferred shares was also void, and that Plaintiff remains a preferred shareholder of Herring. 24. Mikkelsen requests an award of his reasonable and necessary attorney's fees under Chapter 3377 of the Texas Civil Practice & Remedies Code as part of any final judgment rendered herein. COUNT THREE INSPECTION RIGHTS 25. Mikkelsen further sues Defendants Defimdants for their wrongful violation of his statutory rights of inspection under TEX. Bus. CORP. Acr Art. 2.44(C), which provides a corporate shareholder with a statutory right to inspect and make extracts from corporate records. records. Mikkelsen seeks an appropriate order, including, if necessary, a writ of mandamus, compelling .:opies of Herring's Defendants to provide access to and copies Herring' s corporate records. PLAINTIFF'S FIRST AMENDED ORIGINAL PETITION PAGE6 PAGE 6 Appendix p. 63 158 159159159159159 COUNT FOUR BREACH OF FIDUCIARY DUTY, CIVIL CONSPIRACY, AND UNLAWFUL OPPRESSION OF MINORITY SHAREHOLDER 26. Mikkelsen further sues Defendants for the fraudulent and disloyal acts they have directed toward him. Defendants violated the plain terms of Herring's Articles of Incorporation, ofIncorporation, breached their fiduciary duties, and misrepresented facts by attempting to selectively redeem Mikkelsen's preferred shares in a manner not authorized hy by the company's Articles of Incorporation, without notice to all th' the preferred shareholders, and without \.\ithout notice that the company's board of directors and its secret committee v;ere wcre engaged in an insider transaction. Defendants breached their fiduciary duties when they voted on and conducted the purported redemption through secret meetings with hidden procedures. 27. Defendants also made material false representations to Mikkelsen concerning the attempted selective redemption, the motives and procedures of the secret committee that authorized and conducted the purported redemption, and the self-dealing sel f-dealing and differing treatment sh..areholders. within the class of preferred shareholders. 28. The foregoing course of action was part of a general pattern of oppression of cle~rly the product of a civil conspiracy between and Mikkelsen as a minority shareholder, and cle<:1rly among Herring and the Burgesses to accomplish an illegal result, the deprivation or impairment of Mikkelsen's vested property rights, and the violation of Herring's Articles of Incorporation. Plaintiff has been damaged by this conduct, and hereby sues to recover those damages. 29. Mikkelsen's damages include, at a minimum, the dividends due to him as a preferred shareholder since October 31 , 2006, his attorney's fees and expenses required to be incurred as a result of Defendants' improper conduct; and capital gains taxes if the alleged redemptions are required to be reported as such. PLAINTIFF'S FIRST AMENDED ORIGINAL PETITION PAGE 7 PAGE7 Appendix p. 64 159 160160160160160 PRAYER WHEREFORE, PREMISES CONSIDERED, Mikkelsen respectfully requests the Court to cite Defendants to appear and answer and, on final trial, award Mikkelsen relief against Defendants, jointly and severally, as follows: (1) An appropriate order compelling Defendants to immediately provide Plaintiff with the right to inspect all requested records of Herring; (2) Declaratory relief as prayed for herein; (3) Actual damages; (4) Punitive and exemplary damages for breach of fiduciary duties, oppression, and civil conspiracy as pied pled above; (5) Attorney's fees and court costs; (6) Prejudgment interest and post-judgment interest at the highest lawful rates; (7) All writs and processes necessary to effectuate the relief requested; and Attorney's fees and costs of court; and · (8) All other relief Plaintiff Mikkelsen is entitled to receive. Respectfully submitted, POPE, HARD WICKE, CHRISTIE, SCHELL, KELLY &RAY,L.L By: (/~a"~ Lee F. Christi; State Bar No. 042317100 Michael L. Atchley State Bar No. 01397600 500 West 7m Street, Suite 600 Fort Worth, Texas 76102 (817) 332-3245 (Telephone) (817) 877-4781 (Facsimile) Attorneys for Plaintiff PLAINTIFF'S FIRST AMENDED ORIGINAL PETITION PAGES Appendix p. 65 160 161161161161161 This is to certify certuy that a true and correct copy of the above and foregoing Plaintiff Plaintiffss Objections and Responses to Defendants' Second Request for Production has been sent to the following attorneys of record for Defendants via certified mail, return receipt requested, on the 201 s: 1Sth day of January, 2015: 15th Tim Newsom, Esq. Isem, L.L.P. Lovell, Lovell, Newsom & isern, Eagle Centre Building 8th A 112 West gth venue, Suite 1000 Avenue, Amarillo, Texas 79101-2314 Cornell Curtis, Esq. Cornell D. Curtis, P.C. 716 Main Street 11716 Vernon, Texas 76384 Lee F. Christie P:\Mikkelsen1Pleadinj!$1First Amended Original Petition.00<: PLAINTIFF'S FIRST AMENDED ORIGINAL l'E PE TITION rITlo/> PAGE9 Appendix p. 66 161 I"lum ': t .t!rthe ,I TaxUS ARTICLES OF INCORPORATION CEC19~3 OF HERRING BANCORP, INC. Clerk E Corporto.tionB SeetioP I, the undersigned natural person of the age of eighteen (I8) years or more, acting 8S an incorporator of a corporation (hereinafter called the t1Corporation") under the Texas Business Corporation Act, do hereby adopt the following Articles of IncorporatIOn for the Corporation: ARTICLE ONE: NAME The name of the Corporation is Herring Bancorp, Inc. ARTICLE TWO: DURATION The Corporation's perioo of duration is perpetual. ARTICLE THREE: PURPOSE The purpose or purposes for which the Corporation is organized are: (a) To act as 8. bank holding company; (b) To transact any and all lawful business for which corporations may be incorporated under the Texas Business Corporation Act; (c) To do each and every thing necessary, suitable, or proper for the accomplishment of any of thc purposes or for the attainment of anyone or more of the objects herein enumerated or which at any time appear conducive to or expedient for the protcction or benefit of the Corpora liolt. The foregoing clauses shall be construed as powers as well as objects and . purposes, and the matter expressed in each clause shall, unless herein otherwis"e expressly prOVided, be in nowise limited by reference to or inference from the terms of any other cls.use, but shall be regarded as independent objects, purposes and powers, and shall not be construed to limit or restrict in any manner the meaning of the general terms or the general powers of the Corporation. ARTICLE FOUR: STOCK " The Corporation is authorized to Issue two classes of shares to be designated respectively "prcferredR and "common.'1 The total number of shares which the Corporation is authorized to issue is 125,QOO shares. The number of Appendix p. 67 HERR 000075 " preferred shares authorIZed 15 25,000 shares, and the par value of each such share is $95.00. The number of common shares authorized is 100,000 shares, and the par value of each such share is $20.00. (a) The holders of the preferred shares shall be entitled to receive dividends, out of any funds legally available therefor, at the rate of ten percent (10.096) per annum of the par value thereof, and no more, payable in cash semi-annually, or at such intervals as the Board of Directors may from time to tIme determine. Such dividends shall accrue from the date of issuance of the respective preferred shares and shall be deemed to accrue from day to day whether or not earned or declared. Such dividends shall be payable before any dividends shall be paid, declared, or set apart for the common shares, and shall be cumulative so that If for any dIvidend period such dividends on the outstanding preferred shares at the rate of ten percent (10.096) per annum of the par value thereof are not paid or declared and set apart therefor, the deficiency shall be fully paid or declared and set apart for payment, without interest, before any distribution, by dividend or otherwise, shall be paid on, declared, or set apart for the common shares. (b) On any voluntary or involuntary liqUidation of the Corporation, the holders of the preferred shares shall receive an amount equal to the par value of such shares plus any diVIdends declared and unpaid thereon, and no more, before any amount shall be paid to the holders of the common shares. If the assets of the Corporation should be insufficient to permit payment to the preferred share- holders of their full preferential amounts as hereIn provided, then such assets shall be distributed ratably among the outstanding preferred shares. Subject to such preferential rights, the holders of the common shares shall receive, ratably, all remaining assets of the Corporation. A consolidation or merger of the Corporation with or into any other corporation or a sale of all or substantially all of the assets of the Corporation shaD not be deemed a liquidation, dissolution, or winding up of the Corporatlon within the meaning of this paragraph. (c) The Corporation, at the option of the Board of Directors, may at any time redeem the whole, or from time to time redeem any part, of the preferred Shares outstanding by paying in cash therefor the sum of $95.00 per share, plus all diVIdends declared but unpaid thereon as provided in this Article Pour to and Including the date of redemption, heremafter referred to as the "redemptive price,1t and by giving to each preferred shareholder of record at his last known address, as shown on the recordS of the Corporation, at least twenty (20), but not more than fifty (50), days' prIor notice personally or in writing, by mail, postage prepaid, stating the class or series or part of the class or series of shares to be redeemed and Appendix p. 68 HERR 000076 the date and plan of redemption, the redemptive price, and the place where the shareholders may obtain payment of the redemp- tive price on surrender of their respective share cerbficates, hereinafter called the "redemption notice.IT Should only a part of the outstanding preferred shares be. redeemed, such redemption shall be effected by lot, or pro rata, as prescribed by the BOard of Directors. On or after the date fixed for redemption, each holder of shares called for redemption shall surrender his certirlcate for such shares to the Corporation at the place designated in the redemption notice and shall thereupon be entitled to receive payment of the redemptive price. Should less than all the shares represented by any surrendered certificate be redeemed, a new certificate for the unredeemed shares shall be issued. If the redemption notice IS duly given and if sufficient funds are available therefor on the date fixed for redemption, then, whether or not the . certificateS evidencIng the shares to be redeemed are surrendered, all rights with respect to such shares shall terminate on the date fixed for redemption, except for the right of the holders to receive the redemption price, without interest, on surrender of their certificate therefor. (d) If, on or prior to any date fixed for redemption of preferred shares as herein provided, the Corporation depoSIts with any bank or trust company in Texas, or any bank or trust company in the United States duly appointing and acting as transfer agent for the Cor- porabon, as a trust fund, a sum sufficient to redeem, on the date fixed for redemption thereof, the shares called for redemption, with irrevocable instructions and authority to the bank or trust company to publish the notice of redemption thereof, or to complete such publication if theretofore commenced, and to pay, on and after the date fixed for redemption or prior thereto, the redemptive price of the shares to their respectlve holders on surrender of their share certificates, then from and after the date of the deposit, even though such date may be prior to the date fixed for redemption, the shares so called shall be deemed to be redeemed and diVldends on those shares shall cease to accrue atter the date fixed for redemption. The deposit shall be deemed to constitute full payment of the shares to their holders and from and after the date of the deposit, the shares shall be deemed to be no longer outstanding, and the holders thereof shall cease to be shareholders with respect to such shares and sllall have no rights with respect thereto, except the right to receIve from the bank or trust company payment of the redemptive price of the shares, without interest, on surrender of their certificates therefor. (e) Shares redeemed by the Corporation shall be restored to the status of authorized but unissued shares of the Corporation. (f) Except where otherwise provided in these Articles of Incorporation or by law, the holders of the common shares Shall have the Appendix p. 69 HERR 000077 '. exclusive voting rights and powers, including the exclusive right to notice of shareholders' meetings. ARTICLE FIVE: PREBMPTIVE RIGHTS DBNmD No holder of any shares of common stock or preferred stock shall have any preemptive or preferential right to receive, purchase, or subscribe to (a) any Wlissued or treasury shares of any class of stock (whether now or hereafter authorized) of the Corporation, (b) any obligations, evidences of indebtedness, or other securities of the Corporation convertible Into or exchangeable for, or carrying or accompanied by any rights to receIve, purchaSe, or subscribe to, any such unissued or treasury shares, (c) any right of subscription to or rIght to receive, or any warrant or option for the purchase of, any of the foregoing securities, or (d) any other securities that may be issued or sold by the Corporation. ARTICLE SIX: COMMENCING BUSINESS The Corporation wDl not commence business untn It has received con- sideration for the Issuance of its shares amoWltfng to One Thousand Dollars ($1,000.00) in value and consisting of money, labor done, or property actually received. ARTICLE SEVEN: CUMULATIVE VOTING Cumulative voting for the election of directors is prohibited. ARTICLE EIGHT: VOTING Except where otherwise provided in these Articles of Incorporation or the bylaws of the Corporation, the holders of the common stock shall have the exclUSIve voting rights and powers, Including the exclwnve right to notice of shareholders' meetings. ARTICLE NINE: ADOPTION OP BnA WS The Board of Directors of the Corporation shall adopt the initial bylaws of the Corporation and may thereafter alter, amend, or repeal the bylaws of the Corporation or may adopt new bylaws, subject to the shareholders' concurrent right to alter, amend, or repeal the bylaws or to adopt new bylaws. The shareholders may provide that any or all bylaws altered, amended, repealed, or adopted by the shareholders shall not be altered, amended, reenacted, or repealed by the Board of Directors of the Corporation. Appendix p. 70 HERR 000078 " '. ARTICLE TEN: INTERESTED PARTIES A contract or transaction between the Corporation and any other Person (as used herein the term nperson" means an indiVIdual, firm, trust, partnership, joint venture" association, corporation, political Subdivision or instrumentality, or other entity) shall not be affected or invalidated by the fact that (a) any director, officer, or security holder of the Corporation is also a party to, or has a direct or indirect interest in, such contract or transaction; or (b) any director, officer, or security holder of the Corporation is in any way connected with such other Person or with any of its officers or directors. Every person who may become a director of the Corporation is hereby relieved from any liability that might otherwise exist from contracting with the Corporation for the benefit of himself or of any Person in which he has any interest, whether or not the interested director's presence at a meeting or his vote, or votes were necessary to obligate the Corporation m such transaction, if such interest shall have been disclosed to, or known to, the Corporation's directors or Shareholders who shall have approved such transaction. ARTICLE ELEVEN: INDEMNIFICATION Section A. The Corporation shall indemnify any person who was or is a party or is threatened with being made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (all such actions" suits, and proceedings and accompanying modi- fiers being comprehended by the term "Proceeding") (excluding actions by, or in the right of, the Corp~ration), by reason of the tact that he Is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, or agent of another Person. Such indemnification may be made only against those expenses (including attorneys' fees), judgments, f'mes, and amounts paid in settlement actually and reasonably incurred by such person in connection with such Proceeding if' (i) he is successful on the merits or otherwise; or (n) he acted in the transaction which is the subject of' the Proceeding m good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the Corporatlon, and, with respect to any cnminal Proceeding, he had no reasonable cause to believe his, conduct was unlawful. The termination of any Proceeding by judgment, order, settlement, convicbon, or upon a plea ot nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good' faith and in a manner which he reasonably believed to be in or not opposed to the best mterest of the Corporation, nor, with respect to any criminal Proceeding, that he had reasonable cause to believe that his conduct was unlawful. Section B. The Corporation shall indemnify any person who was or is a party or is threatened with being made a party to a Proceeding by or in the right of the Corporation by reason of the fact that he is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, or agent of another Person. Such indemnification may be made against expenses (mc1uding attorneys' fees) actually and reasonably Appendix p. 71 HERR 000079 incurred by such person in connection with the defense 01' settlement of such Proceeding if (1) he is successful on the merits or otherwise; or (ti) he acted in the transaction which IS the subject ot the Proceeding in good faith and in a manner he reasonably belieVed to be in or not opposed to the best interest of the Corporation. However, no indemnification may be made in respect of any claim, issue, or matter in relation to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the Corporation. Notwithstanding the foregoing exception, indemnification may be made to the extent that the court in which such Proceeding was brought shall determine upon application that, despite the adjudication of liabllity but in view of all the circumstances of the case, such person is fairly and reasonably entItled to indemnification for such expenses as the court of appropriate jurISdiction shall deem proper. Section C. Any indemnification tmder Section A or Section B of thIS Article (other than one ordered by a court) may be made by the Corporation only upon a determInation that indemnification of such person is proper In the circumstances because he has met the applicable standard of conduct set forth in such Section. Such determination shall be made by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such Proceeding; or, If such a quorum is not obtainable (or, even if obtainable, if a quorum of disinterested directors so directs), by Independent legal counsel in a written opinion, or by the Shareholders of the Corporation; or through such procedures as shall be authorized in the bylaws of the Corporation. Section D. Bxpenses incurred in defending a civil or criminal Proceeding may be paid by the Corporation in advance of the final disposition of such Proceeding as authorized by the Board of DIrectors or other appropriate body or party in the manner provided in Section C of thlS Article only when the Corporation has received an tmdertaldng by or on behalf of the person who is to receive such payment to repay such amount unless it shall ultlmately be determined that he is entitled to be indemnified by the Corporation as authorized in this Article. Section B. In determining whether the standard of conduct set forth in Section A or Section B has been met, It may be determined that a person has met the standard as to some matters but not as to others, and the amount of indemnification may be accordingly prorated. Section P. The indemnification provided by Sections A through E shall not be exclusive of any other rights to which a person may be entitled by law, bylaw, agreement, vote of shareholders, or otherwise. Section G. The Indemnification provIded by Sections A through B shall inure to the heirs, executors, and administrators of any person entitled to indemnification under this Arbcle. Section H. The Corporation may purchase and maintain inSW'allce on any person who is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee, or agent of Appendix p. 72 HERR 000080 '. another Person agamst any liability incurred by him in any such position or arising out of his status as such, whether or not the Corporation would have' the power to indemnify him. against such liabUity under Sections A through E. ARTICLE TWELVE: REPURCHASE OP STOCK The Corporation Is authorized to purchase, directly or indU'ectly, its own shares to the extent of the aggregate of the unrestricted capital surplus and unrestricted reduction surplus available therefor, without submitting such pur- chase to a vote of the shareholders of the Corporation. ARTICLE THIRTEEN: AUTHORITY TO BORROW The Board of Directors is expressly authorized, without the consent of the stockholders, except so far as such consent is herein or by law provided, to issue .and sell or otherwise dispose of, for any purpose, the Corporation's bonds, debentures, notes or other securities or obligations, upon such terms and for such consideration as the Board of Directors shall deem advisable and to authorize and cause to be executed mortgages, pledges, charges and liens upon aU or part or the real and personal property rights, interest and franchise of the Corpor- ation, including contract rights, whether at the time owned or thereafter acquired. ARTICLE FOURTEEN: INITIAL OFFICE AND AGENT The address of the inItial registered office ot the Corporation is 1900 Pease Street, Vemon, Texas, and the name of its initial registered agent at such address is H. W. Dozler. ARTICLE FIFTEEN: INlTlAL DmECTORS The number of directors constituting the initial Board of Directors of the Corporation is five and the names and addresses of the persons who are to serve as directors until the first annual meeting of shareholders, or untn their respective successors are elected and qualified, are: NAME ADDRESS Robert Belew 2603 Mansard Street Vernon, Texas '16384 C.O.Burgess Suite 1000 Amarillo National Bank Bldg. Amarillo, Texas 79101 B. W. Dozier 1102 Bfllcrest Drive Vernon, Texas 76384 Appendix p. 73 HERR 000081 NAME ADDRESS Curtis D. Johnson 2230 Hllltop Vernon, Texas 76384 John Mikkelsen 2801 Gordon Street Vernon,Texas 76384 ARTICLE SIXTEEN: INCORPORATOR The name and address of the incorporator is: NAME ADDRESS Tonia T. Kittelson 4700 InterPirst Two Dallas, Texas 75270 IN WITNESS WHBREOF, I have executed this document as of the /l,d.- day of3FC&~e~ ,1983. -- . ~~v:~~~ Tonia T. Kittelson STATE OF TEXAS S S COUNTY OF DALLAS S I. , a Notary Public, hereby certify that on this I..Ia:!!! day 1983, personally appeared before me Tonia T. Kittelson, who, being t duly sworn by me, declared that he is the person who signed the foregoing document as incorporator and that the statements contained therein are true. JENAY K GOEBa., Notary Pllbllo In and for the Srate of Texas My commission aplres Feb 19, 1988 . - "- - ~ - - _#' ----- ...... Appendix p. 74 HERR 000082 . . t• ~ f ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION OF HERRING BANCORP. INC. Pursuant to the provisions of Article 4.04 of the Texas Business Corporation Act, the undersigned corporation adopts the following Article of Amendment to its Articles of Incorporatio~m ARTICLE ONE Int'" Off", of t~ Srmtarv of srllfp nf rant The name of the corporation is Herring BaDcorp. Inc. NOV ~ ARTICLE TWO 091GQO The following amendment to the Articles of IncorporatiPJmas.fIN adopted by the shareholders of the corporation on January 19, 1988: To Limit Director's Liability To Shareholders. The amendment is an addition to the original Article of Incorporation and the full text of the provision added reads as follows: ARTICLE SEVENTEEN: DIRECTOR'S LIABILITY TO SHAREHOLDERS To the fullest extend not prohibited by law, a director of this corporation shall not be liable to the corporation or its shareholders for monetary damages for an act or omission in the director's capacity 8S a director, except that this article does not eliminate or limit the liability of a director for: 1. a breach of a director's duty of loyalty to the corporation or its shareholders or members; 2. an act or omission not in good faith or that involves intentional misconduct or a knowing violation of the law; 3. a trans.cttoQ from which a director received an t.prop.~ benefit. whether or Dot the benefit re8ul ted from an action taken within the scope of the director's office; . 4-. an-- act or omission-- for which th.--liability of- a---- director is expressly provided for by statute; or S. act related to an unlawful stock repurchase or payment of a dividend. ARTICLE THREE The number of shares of the corporation outstanding at the time of the adoption was 39,074; and the number of shares entitled to vote on the amendment was 39,074. Appendix p. 75 .... ~ n 0 9 ~ 6 n I ~ ~ 2 ARTICLE FOUR The number of shares that voted for the amendment was 32,115; and the number of the shares that voted against the amendment as o. Dated: November 7, 1988. ATTEST: L1 . HERRING BANCORP, INC. '-~IL-- ERCE, !ecretary BY~~~~~~ a. . ' Chairman of the Board L/J Appendix p. 76 '" .. ARTICLES OF' AMENDMENT 3'F ~ StD of'R1c18 ot1t1e TO ARTICLES O:F INCORPORATION lAY 081998 OF' HERRING BANCORP, INC. Corporallanl eecaon Pursuant to the proviSIOns of Article 4 04 of the Texas Busmess Corporation Act, the underS1gned COIpOrabon adopts the foDowmg Articles ofAmendment to Its Articles oflncorporanon ABTICI,t; ONE The name of the corporation is Herring Bancorp. Inc ARDCLITWO The foDowing amendment to the Arttc1es of Incorporatlon was adopted by the shareholders of the corporation on February 17: 1998 ArtIcle Four -Stock {} The amendment IS an amendment to the ongmal Arbeles of Incorporation Article Four and n the fWI text of the amendment reads as follows fl 2 ') ARneLS FOUR See Exlulnt «It!' attadled hereto and Incorporated herem as af COPied R verbatim Ii • ARTICLI TBREI: 1 o The foDowmg amendment to the Articles ofIncorporatJon was adopted by the shareholders b 1 of the corporatlon on February 17, 1998 Article Eight Voting The amendment IS an amendment to the orip Arttcles oflncorporatlon Article Eight and the fun text of the amendment reads as follows ARTICLE EIGIIT See Exhibit"At. attached hereto and mcorporated herem as If copied verbatim AB1]CL1 roD The foUowina amendment to the Articles oflncorporatton wu adopted by the shareholders of the corporation on February 17, 1998 Article Fourteen RegIstered Agent The amendment IS an amendment to the onsmal Arbclea oflncorporation Article Fourteen and the full text of the amendment reads as foUows ARTICLE FOURTEEN See Exhibit «A!' attached hereto and incorporated herem as if COPied verbatim Appendix p. 77 ... - J ARTICLE FJYE The foUowing amendment to tho Arttcles oflncolJ'Oratlon was adopted by the shareholders ofthe corporation on Febnwy 17. 1998 Article Eighteen Stock restrictions The amendment IS an addrtIon to the ongina! ArtIcles oflncorporatlon and the fuJl text of the prOVJS1on added reads as follows ARTICLE EIGHTEEN See Exhibtt" j(' attached hereto and mcorporated herein as if COPied verbatun ARTICLE SIX The number ofshares oftile corporation outstanding at the tune of the adoption was 32,781, and the number of shares entitled to vote on the amendment was 32,781 [) AB'DCI.E SEVEN o[} The number of shares that voted fur the IIIIICOdmem wu 31,266, and the number of the shares that voted 8pJnst me amendment was 0 "58 Dated Apnl23. 1998 li • 1 ATIEST n . l~dJ~ • DONNA STRlBLlNG. Seer b ? '- Appendix p. 78 HERRING BANCORP, INC. CORPORATE RESOLUTION I. DONNA STRIBLING, Secretary of HERRING BANCORP, INC , do hereby certlty that I am keeper of the records and the nunutes ot the proeeedJngs at the shareholders of SlId Corporation, and that on the 17th day of February. 1998, there was held a meetmg of the shareholders of SlId CorpOration, which was duly caDed and held an accordance With law and the bylaws ofthe Corponmon, and at winch a quorum of the shareholders was present, at said meeting the follOWIng action was duly and legally taken RESOLVED that the shareholders of Herring Bancorp, Inc do hereby authonze the amendment the Arucles of Incorporation of S81d corporanon, speaficaJly Arbcles 4, 8, 14 and 18, copies ofwJuch are attached hereto and Incorporated herein RESOLVED that the shareholders of Hemng Bancorp, [00 do hereby authonze the o amendment of tile Articles of AssociatJon ofHemng National Bank. copy of which IS attached hereto (} and incorporated herem (J "( Passed and approved at ~: 3V o'clock ~ m on February 17, 1998 J . fa. IN WITNESS WHEREOF, I have hereunto set my hand as Sf%dUY ofsasd C~oratIOn, and have attacbed hereto the oftictaJ seal of said Corporatlon, thtS~Hly of _¥= ' 1998 .i " l'I . 04~~ DONNA STRIBLiNG b ~ Secretary Appendix p. 79 RESOLVED. THAT ARfICLE FOUR OF THE AImCLES OF INCORPORATION OF HERRING BAN CORp, INC. BE AMENDED TO READ AS FOLLOWS: ARTICLE row -srocK 1. Classes: The aggregate number of Shares that the Corporation is authorized to Issue IS 625,000, divided mto four classes. The designation of each class IS as foUows: 1. Class A Nonvonng Common Stock. COnslstlng of 250,000 Shares, no par value, h. Class B Nonvoting Common Stock, consisting of 250,000 Shares, no par value; 111. Class C VOllng Common Stock, conslStmg of 100.000 Shares. $20 par value; The nature and extent of the preferences, nghts. privileges, and restnctlons granled to or Imposed on the holders of the respective classes of stock are as follows: .. 1. General: a Class A NonyotJng Common Stock- The holders of the Class A Nonvoting Common Stock will haw no \IOtmg rights or powers. The Class A Nonvotmg Common StDfk will be lSsued from time to time In sene! The Board of DIrectors IS authorlZed to fix. or alter the deSignations, preferences, rights (other than vonng nghts) and quahficatlons. and hmltauons or restncttons of the Class A Nonvoting Common Stock. This Includes. Without hmJ1atJon of the generality of the p.rIYIoP. . . . . divided ~~ dividend IItIeS, and liClllldatlon preferences of any wholly uuissueid Series. ------- b;- - Class B NonyotltlJ Common-- SIock. •The- holders---of- the CI~ B- NolWOtlDg-- Common Stock wdl have no voting rigbts or powen. The Class B Nonvoting Common Stock Will be Issued from time to time in series. Each series itsued by the Board of Directors will relate to a -Prollc Center- of the CarporatlOl1 or a subsidiary of the Corporation, as determllled from time to tlme by the Corporation's Boat4 of Direccon. 111 eacb senes, the only persons who will be ehgible to purchase the shafes of luch aenes will be employees, dil"CtOrs and advisory dueclOrs of the npro6t CenterM to which the series relate. Tho Board of Directors JS authorized to fix or alter the deSignations, preferences, rIghts (other than voung nghts) and quahfications, and hmltations or restnCl10ns of the Class B Nonvoung Common Stock. 'ibIS includes, wltbout 12Z64DZ3.WP5 Appendix p. 80 .. hm113tlon of the generahty of the PICYlOUS sentence. dividend nghts, dlV1C:lend rates, and lIquidation preferences of any wholly unIssued senes. At the end of each fiscal year. the Corporation's Board of Directors may, at ItS opllon and In ns sole dISCretion, declare a Performance Award (as defined below) for one or more senes of Class B Nonvoung Common Stock on the basiS of the performance of the ·Profit _- Center" to which such serIes relates. If declared. the Performance Award shall be detennlncd by the Corporatton's Board of Directors USing the apphcable Performance Measures (as defined below) and the Corporatlon's and liS Subsldlanes' mternal financial records and Information. If the Board of Directors declares a Performance Award for a series of Class B Nonvoting Common Stock. the Performance Award shall be divided ratably among the oUlStandmg shares m such senes. From tIme to tIme, the Corponmon's Board of DIrectOrs shall establish the Performance Measures to be apphed in order to deaemtmc the Performance Award of the shares of Class B Nonvol1ng Common Siock. The Performance Measures may Include. but shall not be Ilmned to, the return of assets or the return on equity of the ·Profit Center· The Perfor- mance Measures may be applied on an absolute basis or relatIVe Industry mdlces. The o Performance Measures shall be apphed conslstendy for each senes of Class B Nonwting o Common Stock. If durmg the course of a fiscal year there should occur slgmficant changes In condJt1ons which the Board of Directors did not foresee 10 estabbshlng the Performance ,....G r Measures for such fiscal year and which. In the Board of DIrectors sole Judgment, have or are J expected to have a subsranttal effect on the perfol'lIlaOOC of the Corporaaon or of a SUbSld1U)', B the Board of Duecton may revise the Performance Measures. l: • The Corporation shall set up an appropnate record, referred to as the ·Class B Stock 1 Ledger", and from time to time enter in the ledger the name of each holder of Class B o Nonvotmg Common Stock. the number of shares held by him or her, the- price p81d for such b shares, the Performance Awards declared for such sbares, and the accrued Apprecl8tcd Value 5 of the shares. For purposes of these Articles. the followlDg terms shall have the following mean- lOgs ·Perfonnance Award" means the award declared by the Corporatlon's Board of DlJ'eCton for one or more sertes of Class B Nonvottng Common Stock expressed an dollars at the conclUSion of a fiscal year, detemuncd in accordance With thiS section; ·Perfonnance Measures· means the performance measures Clllbilabed by die CorporatIodl Board of Dh'ecton from time 10 time lD its sole discretion in accordance with this sectioD; and •Appreciated Valuc· means the accrued value per share of each series of Class B NOIlYOting Common Stock which equals the aggregate amount-of the Performance-Award! declared for sucb share.------ ._------ -- --- ----- SubJect to the Immediately follOWlnB senlence, when a holder of Class B Nonvoting Common Stock IS no longer an employee, director or advisory dbector of the Corporation or one of Its subsu:barlcs (throuah death, disabillty• ..,signallon. mrmlllltion, removal or otherwise). then the Corporation shall. on the next redempdoD date of Class B NonvotiDg Common Stock declared by the Corporation's Board of DIRCtOrs pursua.m to paragraph S.b. of thiS Article. redeem the holder's shares of Class B Nonvoung Com mOD Stock by paymg in cash therefor the sum of (a) the pnce pald for such shares by the holder, plus (b) the then existing Apprecl8ted 12Z640Z3.\1P5 Appendix p. 81 Value of such shares as shown on the Clan B Stocle ledger. If a holder of Class B Nonvoting Common Stock IS either lernunated or removed as an employee, dIrector or adVlsory director of the Corporation or one of Its subsidiarIes -For Cause- • then the Corporation shall, on the next redemption date of Class 8 Nonvoting Common Stock declared by the Corporation's Board of DJJ~ctors pursuant to paragraph S. b. of thIS Article, redeem the holder's Class B Nonvoting Common Stock by paylOg 1ft cash therefor the sum of the purchase pnce paid for ~ucb shares. and aU AppreCIAted Value of such shares shall be forfeited. For the purposes of thiS secuon. the term -For Cause w means (a) faJlure or refusal to comply With all rules and regulations promUlgated by the Corporatlon concernmg the conduct of employees or adVISOry duectolS and the performance of hiS or her dUlles; (b) habitual neglect of hIS or her dUlles; (c) personal or profesSlOnal misconduct where the Corporation's Board of Dll'ectors determines that the conhnued presence or employment of the employee or advISOry dlreclor rs personally or professionally obnOltlous or detnmemal to the Corporatton; Cd) the COIlVJCUOD or plea of gudly or nolo contendere to a felony or misdemeanor JRVOlvlllg fraud. embezzlement, the~ or dishonesty or other cnmmal conduct; (e) WJl1fully diSObeying a lawful directive of the Corporation or J1s Board of DIJ"Ccton, whether through commission or omission. or (0 engagmg tn any fraudulent conduct as detenmned by the Board of Directors c Class C Voting Common Stock. Except as othel'W1se prOVIded by Jaw, the holders of the Class C Voting Common Stock Will have the excluslvc vollng nghts and powers, mcludmg the exclUSIVe nght to notIce of shareholders' meetmgs. 3. Dividends: • 1 I) a. Class A Nog,Yohne Common Stock. The Corporanon may, but is not. obligated to. declare dividends on the Class A Nonvotmg Common Stock from tunc to time. The b, ,. Corporation may pay diVIdends to holders of Class A Nonvotmg Common Srock In excess of diVidendS paid or WithOUt payang diVidends to holders of the Class C Voting Common Stock or the Class B Nonwttng Common Stock. b Class B NOllVOttnl Common Stock. The Corporauon may, but IS not ob11pled to, declare dIVidends on the Class B NOllVotmg Common Stock from tIme to time. The dIVidends of each series wJll be based upon the Performance Measures of the Profit Center to whIch me sencs relates. The Corporation may pay dlvldDnds to holdera of Class B NonvoUDg Common Stock tn excess of dlv1dends paid or without payin& dlvidends to holders of the Class C Votmg Common Stock or Class A NODVOting Common Stock. Notwithstanding any pmvlslon In- these- Arucles-or the CorporatIon!s- byla\w-to-tbecontrary;- ~dlYidends will 8£erue- or be . payable to any shareholder of Class B Nonvoung Common Stock who bas been termmatecl or removed -For Cause-. as such tenn IS defined ID paragraph 2.b. of thiS Anlcle. c. Class C VotlDg Cornman Stock. The Corporation may, but IS not obhgated to. declare dIVidends on the Class C Votmg Common Stock from time to time. The Corporation may pay dIVIdends to holders of Class C Voong Common Srock in excess of diVIdends paid or WIthOUt paylng diVidends to holders of the Class A NORVOtlng Common Stock or the Class B Nonvotmg Common Stock. '2Z64023.WP$ Appendix p. 82 d. Pmerre4 Stock. The holders of the Preferred Stock wIll be entitled to receive dividends, oUt of any funds legally avaIlable therefor, at the rate of ten percent per annum of the par value thereof, and no more, pa)'lble tn cash semi-annually, or at such intervals as the Board of Directors may from tIme (0 time determme. The dividends WIll accrue from the date of Issuance of the respect1ve Preferred Stock and will be deemed to accrue from day to day whether or not earned or declared. The dIvIdends wUl be payable before any dIvidends will be paid, declared, or set apart for the Common Stock and Will be cumulauve so that If for any dividend period the dIvIdends on the outstandmg Preferred Stock at the rate of ten percent per annum of the par value lhereof are not paid or declared and set apart therefor, the defiCIency will be fully paId or declared and set apan for payment, Without mlerest, before any d15tnbullon, by diVidend or otherwise, will be paid on. declared or set apan for the Common Stock. a Preferred Stock. On any voluntary or involuntary hquldatlon, dlssolunon, or Winding up of the aUalrs of the Corporation, the holders of the Preferred Stock will receIve an amount equal to the par \'alue of the shares plus any dlvldends declared and unpaid thereon, and no more, before any amount IS paid to the holders of the Common Stock. If the assets of the Corporation are IDSufficlent to permit payment to the Preferred Stock shareholders of their full preferential amounts as herem provided. then the assets will be dlstrlbuted ratably amoDg the outsUlndmg Preferred Stock b. Class B Nonyotmg Common Stock Subject to the nghts of the Preferred Stock shareholders. 10 the evem of any voluDtary or Involuntary hquldanon, dissolution, or windmg . up of the affairs of the CorporatIon. each holder of the Class B Nonvollng Common Stock win be paId the sum of the price paid for the shares held·by the shareholder, plus (b) the then eXlsung Appreciated Value of the shares held by the shareholder as shown on the Class B Stock Ledger: provided however. If any holder of Class B Nonvotmg Common Stock has been term mated or removed ·Por Causc· (as such renn IS defined in paragraph 2 b. of thIS MIele). then m the event of any voluntary or Involuntary liqUidation, dissolution, or Winding up of the affairs of the CorporatIon, such shareholder will be paid an amount equal to the aggregate pnce pald for the shares of Class B NOJM)nng Common Stock held by lueb sbareholder; and all Apprec18ted Value of such shares shall be forfeited. --0.------. Glass A NOnvot1D1 Common Stock and Class C VoJlDg Common Stock SubjeCt- to the rights of the Preferred Stock shareholders and the Class B Nonvoting Common Stock shareholders, the remllDlng ISsets and funds of the Corporation wdl be distrIbuted equally among the holders of the Class A Nonvoting Common Stock and the Class C VOting Common Stock, pro rata, accordtng to the number of shares beld A merger, consohdatlon, and sale, lease, or conveyance of assets wall not be considered a IIquidatron and dJssolutlon of the Corporation for the purposes of the liqUidation prOVISIOns set fonh above. except that any reorgamzation an WhiCh the Shares havtng a hquulanon preference 12264023.WP5 Appendix p. 83 set fonh above are not completely earned through to the new company will not be considered a hquldation for the purposes of the hquldatton preferences set fonh above. $. RedemplioD: a. Preferred Stock. The Corporauon. at the option of the Board of Directors, may at lIny time redeem me whole. or from ume to ume redeem any pan, of the Preferred Stock outstanding by paying in cash merefor the sum of $95 per share. plus all dlvulends declared bur unpaid thereon as provided m thIS Anlcle Four to and Includmg the date of redemption. hereinafter referred to as the "redemptJve pnce.· and by gJvJng to each Preferred Stock shareholder of record at that Preferred Stock shareholder's last known address. as shown on the records of the Corporation, at least 20, but not more than SO. days' pnor nonce personally or In writing. by mad. postage prepaid. statlllg the class or senes or pan of the class or senes of shares to be redeemed and the date and plan of redempnon. the redemptive pnce. and the place where the shareholder can obtain payment of the redemptive price on surrender of their respeetlve share cenlficates. hereinafter called the ·redempl1on notIce. Should only a part of II (I the outstanding Preferred Srock be redeemed. the redemption wUi be effected by lot or pro I3ta. [J as prescnbed by abe Board of Directors. On or after tbe date fixed for redemption. each holder ~l of shares called for redemption will surrender hiS or her certificate for the shares to the l. CorporatIon at the place deSignated In the redemption nonce and WIll thereupon be enntled to receive payment of abe redemptlve price. Should less than all the shares represented by any - t: ~ surrendered certificate be redeemed, a new cemficate for the unredeemed shares will be ISSUed. o If the redemption notice IS duly given and if sufficIent funds are avadable on the date fixed for • 1 redemption. then. whether or not the cenlficates cvldencmg the shares to be redeemed an: surrendered, all nghts wnh respect to the shares Will tenmnate on the date fixed for redcmpnon. o h except for the nght of the holders to receive the redemption price. wlthoultnterest. on surrender !1 of their certificate If. on or pnor to any date fixed for redemption of Preferred Stock as hereln provided. the Corporation depOSIts With any bank or trust company 1R 1exas or any bank or trust company ID the Umted States duly appomtlO3 and actmg as transfer agent for the Corpol3tlon as a trust fund, a sum suffiCient to redeem, on the date fixed for redemption thereof. the shares called for redempbon, with trrevocable mstruCbOns and authority to abe bank or trust company to publish the notice of redemption thereof. or to complete the pubhcatlon If theretofoIe commencecl. and to pay. on and after the date fixed for redempbon or pnor thereto, the redemptive price of the shares to theIr respectIve holders on surrender of their share certificates. then from and after the date.. of the. depOSIt. ev.en. though. that date may_ be. pnor. to. the date. fixed. for..redcmptioD.- the.. _.. shares so called will be deemed to be redeemed; and diVidends on those shares wdl cease to accrue after the dare fixed for redemption The depOSit Will be deemed to constllute fuU payment of the shares to theIr holders; and from and after the date of the deposit, the shares will be deemed to be no longer outstanding; and the holders thereof Will cease to be sharehoJders WIth respect to the shares and Will have no ngb1i with respecl thereto, except the right to receive from the bank or trust company payment of the redemptive pncc of the shares, Without Interest. on surrender of thelf cemficafes Appendix p. 84 b. Class B Nonvoqng Common Stgck. The Class B Nonvoting Common Slock shall be redeemable at the option of. and at die dlscretion of the Board of Directors. In whole' or in part. at any time on twenty (20) days nottce. The redemption pnce per share shall be equal to the sum of (a) the price patd for such shares by the shareholder, plus (b) the then CXIStlOg Appreciated value of such shares as shown on the Class B Stock ledger, provided however, If the holder of the shares to be redeemed was terml11ated or removed -For Cause· (as such term IS deftned an paragraph 2.b of thiS Amcle), then the Iedempuon pnce per share shall be equal to the pnee paid for such shares; and all Apprecl8ted Value of such shares shall be forfeited Howe\'er. no redemption would render the Corporation lnsolvent, or would reduce the Corporauon's net assets belOYI the aggregate amount payable to the holders of any shares havtng pnor or equal nghlS to the assets of the Corporaoon on mvolunlary dissolution. The Corporation must give nouce of the redemption of any or all shares by call and wnlten or prtnted notice. The nouce of redemption must set fonh all of the fol1owmg: The series of shares or part of any senes of shares to be redeemed; o o(j The date fixed for redemptJon; II. . ,. t- IIi The redemptIon pnce; t: IV. The place at which the shareholders may obtam payment of the redemp- I: tJon pnce on surrender of theIr share certificates .- •l A copy of the notICe of redemption. poSlage prepaId. must be mailed 10 each holder of G shares to be redeemed, of record as of the date of maIling or as of the record date fixed m ho accordance WIth the bylaws, addressed to the holder, at hlS or her address appeanng on the Corporation books or gIven by him or her to the Corporauon for the purpose of nonce, or if no such address appears or IS given, at the place where the pnnctpal office of the Corporauon IS locared, DOt less than 20 days before the date fixed for redemptlon. The redemption payments may be made from any legally available source or fund. If, on or pnor to any dare fixed for redempUonof Class B NonvodDa Common Stock as herem provided. the CorparaUon deposits with any bank or trust company 11l1au or any bank or trust company in the United States duly appointing and acting as transfer agent for tho Corporation· as ·a-trust- fund, a sum- 5ulkIen~, [0, redeem., on- the date. fixed for =!emption thereof. the shares called for redemption, With irrevocable mstrucuons and authority to the bank or trust company to pubhsh the notice of redemption thereof, or to complete the pubbcatlon if theretofore commenced, and to pay. on and after the date fixed for redemption or pnor thereto. the redempllve pnce of the shares to their respective holders on sumndcr of their share cemficates, then from and after the date of the depOSIt, even though that date may be prior to the date fixed for redemption. the shares so called will be deemed to be redeemed; and dIVIdends on those shares will cease to accrue after the dare fixed for redemption. The deposJr will be deemed to COnstitute full payment of the shares to their holders; and from and after the dale of 122610023.\.5 Appendix p. 85 · .". ." the depoSlt, the shares will be deemed to be no longer outstandmg; and the holders thereof wIll cease to be shareholders with ~SPCCt to the shares and wIll have no nghts With respect thereto, except the ngbt to receive from the bank or trust company payment of the redemptive price of the shares, WithOut Intere~ on surrender of their cettlficates. Sbares redeemed by abe Corporation wIll be restored to the stalUS of authorized but uniSSUed shares of the CorporatIon. .. 1 Q , l~ 122M0Z3.WP5 Appendix p. 86 RESOLVED, mAT ARTICLE EIGHT OF THE ARTICLES OF INCORPORATION OF HERRING BANCORP, INC BE AMENDED TO READ AS FOLLOWS • Except where otherwise provided m these Articles of Incorporation or bylaws of the COrpoI1lUOn. the holders of(a) Class C Conunon Stock ISSUed after February 17, 1998 and/or (b) old Common Stock ISSUed pnor to FebJUary 17, 1998. shall have the exclusive votmg ngbts and powers, mcludmg the exclUSive ngbt to notice of shareholders' meetings r(i o to ] g I Appendix p. 87 RESOLVED, TIlAT ARTICLE FOURTEEN OF TIlE ARTICLES OF INCORPORATION OF HERRING BANCORP, INC BE AMENDED TO READ AS FOLLOWS ABDCLE mVBDEN; REGISTERED AGENT The address oftile lIUtJaI regtStered office IS 1900 Pease Street, Vernon, Texas 76384 and the name of the initial regastered agent at such address is Curtis D Johnson u (J o-. • 1 U ... / ') • Appendix p. 88 RESOLVEn, THAT ARTICLE EIGHTEEN OP THE ARTICLES OF INCORPORATION OF HERRING BANCORP, INC BB AMENDED TO READ AS FOLLOWS ARTICLE IIGIITIEN; smCK BESTBIrnQNS For aD treasury stock IsSUed after February 17, 1998, before there can be a valId sale or transfer of these certificates of the conunon sharet of the corporation by any holder thereof. such holder shall first ofter SlId abares to the corporation in the following manner Such o«ering shareholder shall deliver a notice to the Corporation In wntmg (1) by certIfied IJI8lI, return receipt requested, (2) WIth a copy of the bonafide wntten, Signed ofI'er wluch IS acceptable to the shareholders, SIgned by both the proposed purchaser and the proposed seDer, stabDg thetenDI aDd conditions of tho proposed sale (J e the pnce, tenns and oondrttons of such proposed sale or transfer, the number of shares to be sold or tran~ and his Intention to so seD or transfer such shares) to the SecretaJy of the corporacion The Bank shaD have 30 days thereafter In wlucb to eather accept or ~ect the 01l'er on behalf of the corporation If the offer IS accepted. u [} the corporation shall comply WIth the tenns and conditlons ofthe offer as stated, OR. U Ifthe corporation and the proposed shareholder agree, tender the fuU cash sales pnce, "c Wltiun 10 days of acceptance by both parties Should tho corporation fall to purchase C. ~ the shares at the expiidbon of the 30 day period, or pnor thereto declme to purchase 1; the shares, the shareholder may sell the stock u offered, but If'thlll sale fads to close, li the obligauons and restrICtIOns continue m fuB and effect with respect to any subsequent sale . Appendix p. 89 HERRING BANCORP, INC. C. C. Burgess Chlli"""'n oj,he 8<> Notice of Redemption 1101 CMc Circle, Suite 1001 Amarillo, TX 79109 October 31 , 2006 R O. Box 9900 Amarillo, TX 79105-5900 Dear Preferred Stock Shareholder: (806) 373-3921 Phom! (806) 372-8230 Fax This Ictter is to notify you that the board of directors (the "Board") cchll rgess@lterrittghattk.com of Herring Bancorp, Inc. (the "Company") has called for the redemption (the " Redemption") of your outstanding shares of Preferred Stock (the "Preferred Stock") of the Company on November 20,2006. As you know on July 26, 2006, our Board approved taking the nece.ssary acts for the Company to become an "s corporation" under the Internal Revenue Code of 1986. as amended. In order to become eligible to make the Subchapter S election. the Company is only all owed to have one class of outstanding capital stock, and voting ri ghts between shares of stock are disregarded for determining whether a company has more than one class of stock. At the current time, the Company has a number of outstanding classes of stock, which include your Preferred Stock shares. as well as Class A Nonvoting Common Stock, Class A-Se ries 2 Nonvoting Common Stock, and Class B Nonvoting Common Stock (collectively. the "Nonvoting Shares"). Therefore, we must currently consolidate our Nonvoting Shares into one class. The Class A Nonvoti ng Common Stock and the Class B Nonvoting Common Stock will be allowed to exchange their shares for Common Stock-Series A, and the Class A-Series 2 Nonvoting Common Stock will be converted into a subordinated debenture. As a result of this process, the Board appointed a committee to recommend the criteri a for detennining whic h Preferred Stock shareholders would be offered to exchange their shares for the Company's common stock (the "Common Stock" ), the nonvoting Common Stock- Series A (the "Common Stock-Series A" ) or to have their shares redeemed. The Board's criteria for making thi s detennination included whether the Preferred Stock shareholder had a banking relationship with Herring Bank (the " Bank"), and whether they would own at least 50 shares of Common Stock upon the conversion. If these criteria were met, the Board offered the Preferred Stock shareholders the option to exchange their shares for the Common Stock. If the Preferred Stock sharehol der did not meet these criteri a, the Board determined the Preferred Stock shareholders would be redeemed. Additionally, if the Preferred Stock shareholder did not have a banking relationship with the Bank. we would offer them the option of either exchanging their shares for the nonvoting Common Stock-Series A or having their shares redeemed. From our Appendix p. 90 conversations with you and the Board's determinations regarding our classes of stock, your Preferred Stock will be redeemed. The Redemption will take place after 5:00 p.m. on November 20, 2006 (the ''Redemption Date"). The price to be paid for each share of Preferred Stock will be $95.00 per share, plus an amount equal to all dividends accrued and unpaid thereon, whether or not declared, pro rata to the date fixed for the redemption (the ''Redemptive Price"). As a result of the Redemption, the Company will pay you $95.00, in cas~ for the shares of Preferred Stock you hold that will be redeemed Prior to or at the open of business after 5:00 p.m. on November 20, 2006, the Company will deposit with Herring Bank, Amarillo, Texas (hereinafter the "Transfer Agent"), as a trust fund, an amount necessary to pay the aggregate Redemptive Price, together with irrevocable instructions and authority to the Transfer Agent to pay, on or after the Redemption Date, the Redemptive Price to the holders of the Preferred Stock upon the Transfer Agent's receipt of the duly surrendered certificates representing their Preferred Stock. As a result of the Company's deposit of funds with the Transfer Agent, 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. In order to receive the Redemptive Price, you should deliver to the Transfer Agent the following: (i) a duly executed Letter of Transmittal, a copy of which is enclosed herewi~ and (ii) the stock certificate(s) representing your shares of Preferred Stock. The address of the Transfer Agent is Herring Bank, P.O. Box 9900, Amarillo, Texas 79105. The telephone number of the Transfer Agent is (806) 355-0153. Please follow carefully the Instructions to the Letter of Transmittal when completing it Assuming the Transfer Agent receives the applicable documents from you prior to the Redemption Date (and assuming there is no problem with these documents), the Transfer Agent will hold them in escrow for you until the Redemption Date, at which time you will receive payment for your shares. The Company will pay the Redemptive Price by check of same day funds. Please refer to the Letter of Transmittal provided herewith for further instructions on how to surrender certificates and receive delivery of the Redemptive Price. You may obtain additional copies of the Letter of Transmittal from the Company. Also, if any of your Preferred Stock certificates have been lost, stolen or misplaced, or if any of your shares are pledged or encumbered, you will need to make additional arrangements in order to receive the Redemptive Price for your shares. Please contact the Transfer Agent for further details. Appendix p. 91 Preferred Stock Shareholder October 31, 2006 Page 3 Assuming that the Transfer Agent has received these documents from you on or before 5:00 p.m. on November 20, 2006 (and that there are no problems with your documents), you will be able to receive payment for your shares on the Redemption Date. You may pick up your check on the Redemption Date at Herring Bank. 2201 Civic Circle, Amarillo, Texas during regular business hours. If you will not be available to pick up your check in person at that time, please contact the Transfer Agent so that you can arrange an alternate method of delivery of the Redemptive Price for your Preferred Stock. If you do not pick up your check on the Redemption Date or contact the Transfer Agent to make other arrangements, the Transfer Agent will mail your check to you at the close of business on the Redemption Date. If your documents are not in order so that your check is not available on the Redemption Date, your check will be mailed to you as soon as possible after your documents are received and approved. Please remember that the Redemption of your Preferred Stock may be a taxable transaction for federal income tax purposes. There also may be state, local or foreign income or other tax consequences to the Redemption. You should consult your own tax advisor to determine the precise tax consequences of this transaction. If you should have any questions in connection with any aspect of this letter, please feel free to call C.c. Burgess at (806) 373-3921. ~~~ C.C. Burgess Chairman of the Board Appendix p. 92 . HERRING BANCORP, INC. P,If'rr.d Stockholder. Lilt .. of 61D!IOS FJI'II Nlme Pr.'.fnd LUI Nama Addren City St3l. ZIp SSN CorU '" ShUll % Own,n;hlp JanD Slimp !lumen, CO-Trul,ee,IlNB Co-Trustee, for Comella Johnson Slemp Trust Monarcl1 Tru l l Co, Trultoe, Jesslo JeMson Box 50468 AIlIarlllo TX 79159 '019 '" 3 ,301427% 117 E$pllltI Dr Amarillo Nalehot TX MS 79159 ~9120 .018 .027 ,470 " 0.550238% 8.425517% Mllruo Colqulll Burgin BO)r 50488 Ama~lIo TX 79159 11016 1053 8.03 54n ·~ CC Burgess Bo)( 50488 Amarillo TX 79159 1,11024,.029 7662 45. 176821 % Kelly & SUlon Couch LMnIl TI'\I$\ 3917 Toxas Vernon TX 763S4 ,fOJl 2940 16.851035% Susan Spiller Culbertson 1269 ElIsl GllIMr Or Sail Laka City UT 84105 11026 ,.10 8.425517'.4 Mallory John Harriet Burge,. Mikll;elsen Mikkelsen Trust Myel'll Vernon Parts Inc 3912 Winlor Park lana 2429 Texas St 770 M eadow Vale Or 1701 Marsha n A.d '030 '012 "00 ,,. '" '50 0.659747% 0 .859747% 3.782885% 5.731644 % TOTAL PREFERRED STOCK 17447 100.000000% . . . PLAINTIFF'S EXHIBIT I- Appendix p. 93 25- .. ' ,.. f l ~ IN ..... L... ,Ham, • 01 S hor • • Sll OIOS '00' V.lut PI' $Iltl/O$ Book S hor, .,~ I Sh ... 0 1 Com "'o n 10<: ". Common .. Com"''''' ~ Sh . ... C• • h lor Fr.etlM • $69 8. 10 510 Common P.,. Sho .. CI ... k i"llrIeoton WIlIltn ,\ dIiiIiO " Doell.. , ,,, .. IO • .~7 JO.n J.e22.01 1 0. ~ I O I ~.H~ , 3 31.5 1 3 •• 90 . ~ "- 181.69C!.30 19. ~ I O I W• • IRA ~ . '1 0 . 000 ~" 26U59 '"n• "' ~ 161.090.60 "'" ",,' c. ~_ J"" ,~ s"_, T",,, G wo«>n:: IRA ,.- w""",. rt! IRA SI"""",e 165.3119 5 12.225 3 ~1 . 11 5 J.l7 . ' ~ 36.13 36.13 36.73 JO.73 36.73 e.07u . I a,(lIle26 I II I 18.8 14.02 llU)0626101 I J.l le.l l ' O. ~I O I 12.JDl.6l 111.(10112(110 1 12..)!lH2 IIU)(I626 1D. 1.102 26. II~ 18821 . 7.753 . "" -~ 663. '2 ~l'J. 07 =~ 5.58<.&0 l a .I ~. 60 12.5M.&O 11.lIIlI .YO 331 .• 25 17.7!iJ =.~ " .IIIl7.70 TCI:>! Cl>u A 6.920.2311 :16./3 250'.321.19 JO.4.J I3 M. 3.709.211 50.11 11.00 6SlI.10 Cia .. II; RI:!Il I", CInI ......., '. ' 01.0 l 0 ~ .M 1I. HIUO lo.e&JOTeoD 101.963 '" ~ 70 .~ . I O -" CI. .. A . ."', 2, ,-- c;..Mf'l!ru BURGesS SEPAHA1E PRClP'ERlY &.000.000 2' 3 '" 1.9011.52(1.00 " C!!!W,n .o . !ltt!r!!Y" . J_ S-~. CO:lfWOa.HNa Co-TIIIS1 ........ CcmtoIII _ ~1,"1""" '1 Sh.1fO<\ Il.Inev SIorn;J 1"", """"tOo '""I Co. 1"",100. ~ Jot-.... -'- """'T""YW~ B'-"ll .... " .. 5711.000 I.H O.DOO 0>00 n .oo 95.00 50' .11'0.00 13D.Me.00 7.34&&1 '05 1.3'&02 105 1.3'&02 105 ..- ",.. lOO.Q.l l \OJ.2M ,.," "'.~ 401 .70 ".00 2011.10 !.I .451.aD 9.07~ . 30 139.620.00 ''''''I)
" K...,. &s.,.." eo..cr. LNi.'>g 1 I.O~ . OOO 1.8112.000 1.11-1 0.000 115.00 115.00 gS.OO 100.0 35.00 148.7110.00 219.JOO.00 7.301!421 05 7.l-I&021 0S 7.l-I&o2' D:I I.OT2.1I11 .. Cu: :>or"..::n S_n SPlet ~'" "" 1." 0 .000 115.00 IJII.6!iO.OO 7.l-I&l2 105 ".00 >39.620.00 - ..... ~"., "'" TOUI PrwI .... O
"~ Par.. I V......,.., 1$0.000 '!.O.OOO ~ 1.000.000 11." 1.000 " .00 " 00 .. 00 " .00 "'00 '4 .250.00 " .250.00 62.100.00 n .ooo.oo U~1 . -4 65 . 00 1.301&1 2' 0 5 7.30501 2,05 7. 3'&l 2 10~ t.34-421 0 ~ ,. ",. 20 -41 3 20 ~ 13 ""8 1 ~ ~ ~ ~ 2.311 ' . .00 26/1.00 ~.'O ~.~ 2.269.90 13.962.00 13.1152.00 62.1:16.!IO 11-1 .11-1' .110 1.65S.l gS.IO ega.lo CI. .. C: ~ n.61s.oo 698. 10 22,762.-4S3.50 ,...... l2.!\:I~.OOO 32.635 '.00 22.182.-49BO M .... l0 •"-~ Oo:bon"''' "or 8olarI ~.- M M .3e .~~ .. 2·.1 ~ . 8 •• .60 ~ 1,11011,5:>0.00 2 0.100.3 Gl .N 811&.' 0 , ~ 0 .0 ' " DEFENDANT'S i g DEPOsmOH- EXHIBIT I ~'L ! 12 I Appendix p. 94 #2004-126 AGREEMENT BY AND BETWEEN The Herring National Bank Vernon, TX and The Onicc orthe Comptro ll er of the Currency The Herring National Bank, Vernon, TX (Bank) and the Comptro ll er of the Currency of the Un ited States of America (Comptroller) wish 10 protect the interests of the depositors, other customers, and shareholders of the Bank, and , toward thai end, wish the Bank to operate safely and soundly and in accordance wit h a ll app licable laws, rules and regu lat ions. The Comptroller, through her National Bank Exam iner, has exam ined the Bank , and her findin gs arc contai ned in the Report of Examination, dated 3/3 J/2004 (ROE). In consideration o f the above prem ises. it is agreed, between the Bank, by and through its duly elected and acting Board of Directors (Board), and the Comptro ll er, through hc r authori zed representative, that the Bank shall ope rate at a ll times in compl iance with the articles of thi s Agreement. Article I JUR ISDICTION (I) This Agreement sha ll be construed to be a "written agreement entered into with the agency" with in the meaning of 12 U.S.C § 1818(b)(I). (2) This Agreement shall be construed to be a "written agreement between such depository instituti on and such agency" within the meaning of 12 U.S.C. § IS IS(e)(J) and 12 U.S.C . § 1818(i)(2) . (3) Thi s Agreement sha ll be construed to be a " formal written agreemen t" within the meaning of 12 C.F.R. § 5.5 1(e)(6)( ii). See 12 U.S.C. § 183 I i. Appendix p. 95 (4) This Agreement shall be construed to be a "written agreement" within the meaning ofI2 U.S.C. § 1818(u)(J)(A). (5) All reports or plans which the Bank or Board has agreed to submit to the Assistant Deputy Comptroller pursuant to this Agreement shall be forwarded to the: Assistant Deputy Comptroller Lubbock Field Office 5225 S. Loop 289, Suite 108 Lubbock, TX 79424 ARTICLE II COMPLIANCE COMMITTEE (I) Within thirty (30) days, the Board shall appoint a Compliance Committee of at least five (5) directors, of which no more than two (2) shall be employees of the Bank or any of its affiliates (as the term "affiliate" is defined in 12 U.S.C. § 37Ic(b)(I», or a family member of any such person. Upon appointment, the names of the members of the Compliance Committee shall be submitted in writing to the Assistant Deputy Comptroller. The Compliance Committee shall be responsible for monitoring and coordinating the Bank's adherence to the provisions of this Agreement. (2) The Compliance Committee shall meet at least monthly. (3) Within thirty (30) days of the appointment of the Committee and quarterly thereafter, the Compliance Committee shall submit a written progress report to the Board setting forth in detail: (a) actions taken to comply with each Article of this Agreement, and (b) the results of those actions. (4) The Board shall forward a copy of the Compliance Committee's report, with any -2- Appendix p. 96 additional comments by the Board, to the Assistant Deputy Comptroller. ARTICLE III MANAGEMENT AND BOARD SUPERVISION STUDY (1) Within sixty (60) days the Board shall employ an independent outside management consultant. Prior to employment ofthe consultant, the name and the qualifications of the consultant considered for employment shall be submitted to the Assistant Deputy Comptroller, who shall have the power of veto over the employment of the proposed consultant. However, failure to exercise such veto power shall not constitute approval or endorsement of the consultant. (2) The requirement to submit information and the prior veto provisions ofthis Article are based on the authority of 12 U.S.C. § 1818(b) and do not require the Comptroller to complete hislher review and act on any such information or authority within ninety (90) days. (3) Within one hundred twenty (120) days, the Consultant shall complete a study of current management and Board supervision presently being provided to the Bank, the Bank's management structure, and its staffing requirements in light of the Bank's present condition. The findings and recommendations of the Consultant shall be set forth in a written report to the Board. At a minimum, the report shall contain: (a) the identification of present and future management and staffing requirements of each area of the Bank, with particular emphasis given to the lending, audit and operations areas; (b) detailed written job descriptions for all executive officers; (c) an evaluation of each officer's qualifications and abilities and a -3- Appendix p. 97 detennination of whether each of these individuals possesses the experience and other qualifications required to perfonn present and anticipated duties ofhislher officer position; (d) recommendations as to whether management or staffing changes should be made, including the need for additions to or deletions from the current management team; (e) objectives by which management's effectiveness will be measured; (f) a training program to address identified weaknesses in the skills and abilities of the Bank's statTand management team; (g) an evaluation of current Iines of authority, reporting responsibilities and delegation of duties for all officers, including identification of any overlapping duties or responsibilities; (h) a recommended organization chart that clearly reflects areas of responsibility and lines of authority for all officers, including the Bank's president and chief executive officer; (i) an assessment of the Board's strengths and weaknesses along with a director education program designed to strengthen identified weaknesses; 0) an assessment of whether Board members are receiving adequate infonnation on the operation of the Bank to enable them to fulfill their fiduciary responsibilities and other responsibilities under law; (k) recommendations to expand the scope, frequency and sufficiency of infonnation provided to the Board by management; (I) an evaluation of the extent of responsibility of current management and/or -4- Appendix p. 98 the Board for present weaknesses in the Bank's condition; and (m) recommendations to correct or eliminate any other deficiencies in the supervision or organizational structure of the Bank. (4) Within one hundred eighty (180) days of completion of this study, the Board shall develop, implement, and thereafter ensure Bank adherence to a written plan, with specific time frames, that will correct any deficiencies that are noted in the study. (5) The Board shall ensure that the Bank has processes, personnel, and control systems to ensure implementation of and adherence to the plan developed pursuant to this Article. (6) Copies of the Board's written plan and the Consultant's study shall be forwarded to the Assistant Deputy Comptroller. The Assistant Deputy Comptroller shall retain the right to determine the adequacy of the report and its compliance with the terms of this Agreement. In the event the written plan, or any portion thereof, is not implemented, the Board shall immediately advise the Assistant Deputy Comptroller, in writing, of specific reasons for deviating from the plan. ARTICLE IV STRATEGIC PLAN (1) Within one hundred twenty (120) days, the Board shall adopt, implement, and thereafter ensure Bank adherence to a written strategic plan for the Bank covering at least a three-year period. The strategic plan shall establish objectives for the Bank's overall risk profile, earnings performance, growth, balance sheet mix, off-balance sheet activities, liability structure, -5- Appendix p. 99 capital adequacy, reduction in the volume of nonperforming assets, product line development and market segments that the Bank intends to promote or develop, together with strategies to achieve those objectives and, at a minimum, include: (a) a mission statement that forms the framework for the establishment of strategic goals and objectives; (b) an assessment of the Bank's present and future operating environment; (c) the development of strategic goals and objectives to be accomplished over the short and long term; (d) an identification ofthe Bank's present and future product lines (assets and liabilities) that will be utilized to accomplish the strategic goals and objectives established in (l)(c) of this Article; (e) an evaluation of the Bank's internal operations, staffing requirements, board and management information systems and policies and procedures for their adequacy and contribution to the accomplishment of the goals and objectives developed under (l)(c) of this Article; (f) a management employment and succession program to promote the retention and continuity of capable management; (g) product line development and market segments that the Bank intends to promote or develop; (h) an action plan to improve bank earnings and accomplish identified strategic goals and objectives, including individual responsibilities, accountability and specific time frames; (i) a financial forecast to include projections for major balance sheet and -6- Appendix p. 100 income statement accounts and desired financial ratios over the period covered by the strategic plan; G) control systems to mitigate risks associated with planned new products, growth, or any proposed changes in the Bank's operating environment; (k) specific plans to establish responsibilities and accountability for the strategic planning process, new products, growth goals, or proposed changes in the Bank's operating environment; and (I) systems to monitor the Bank's progress in meeting the plan's goals and objectives. (2) Upon adoption, a copy of the plan shall be forwarded to the Assistant Deputy Comptroller for prior detennination of no supervisory objection. (3) The Board shall ensure that the Bank has processes, personnel, and control systems to ensure implementation of and adherence to the plan developed pursuant to this ARTICLE V INTERNAL AUDIT (1) Within ninety (90) days, the Board shall adopt, implement, and thereafter ensure Bank adherence to an independent, internal audit program sufficient to: (a) detect irregularities in the Bank's operations; (b) detennine the Bank's level of compliance with all applicable laws, rules and regulations; (c) evaluate the Bank's adherence to established policies and procedures, with -7- Appendix p. 101 particular emphasis directed to the Bank's adherence to its loan policies concerning underwriting standards and problem loan identification and classification; (d) ensure adequate audit coverage in all areas; and (e) establish an annual audit plan using a risk based approach sufficient to achieve these objectives. (2) As part of this audit program, the Board shall evaluate the audit reports of any party providing services to the Bank, and shall assess the impact on the Bank of any audit deficiencies cited in such reports. (3) The Board shall ensure that the Bank has processes, personnel, and control systems to ensure implementation of and adherence to the program developed pursuant to this (4) The Board shall ensure that the audit function is supported by an adequately staffed department or outside firm, with respect to both the experience level and number of the individuals employed. (5) The Board shall ensure that the audit program is independent. The persons responsible for implementing the internal audit program described above shall report directly to the Board, that shall have the sole power to direct their activities. All reports prepared by the audit staff shall be filed directly with the Board and not through any intervening party. (6) All audit reports shall be in writing. The Board shall ensure that immediate actions are undertaken to remedy deficiencies cited in audit reports, and that auditors maintain a written record describing those actions. (7) The audit staff shall have access to any records necessary for the proper conduct - 8- Appendix p. 102 of its activities. National bank examiners shall have access to all reports and work papers of the audit staff and any other parties working on its behalf. (8) Upon adoption, a copy of the internal audit program shall be promptly submitted to the Assistant Deputy Comptroller. ARTICLE VI CREDIT RISK (1) Within ninety (90) days, the Board shall develop, implement, and thereafter ensure Bank adherence to a written program to reduce the high level of credit risk in the Bank. The program shall include, but not be limited to: (a) procedures to strengthen credit underwriting, particularly in the real estate portfolio; (b) procedures to strengthen management of loan operations and to maintain an adequate, qualified staff in all functional areas; (c) procedures for strengthening appraisal processes; and (d) an action plan to control real estate and payday loan growth. (e) The Board shall submit a copy of the program to the Assistant Deputy Comptroller. (f) At least quarterly, the Board shall prepare a written assessment of the bank's credit risk, which shall evaluate the Bank's progress under the aforementioned program. The Board shall submit a copy of this assessment to the Assistant Deputy Comptroller. (2) The Board shall ensure that the Bank has processes, personnel, and control -9- Appendix p. 103 systems to ensure implementation of and adherence to the program developed pursuant to this ARTICLE VII NEW SENIOR EXECUTIVE OFFICER (I) Within one hundred twenty (120) days, the Board shall appoint a senior credit officer who shall be vested with sufficient executive authority to fulfill the duties and responsibilities of the position and ensure the safe and sound operation of the Bank. (2) Prior to the appointment of any individual to the senior credit officer position, the Board shall submit to the Assistant Deputy Comptroller the following information: (a) a written statement of the Board's reasons for selecting the proposed officer; and (b) a written description of the proposed officer's duties and responsibilities. (3) The Assistant Deputy Comptroller shall have the power of veto over the employment of the proposed senior credit officer. However, the failure to exercise such veto power shall not constitute an approval or endorsement of the proposed officer. (4) The requirement to submit information and the prior veto provisions of this Article are based on the authority of 12 U.S.C. § 1818(b) and do not require the Comptroller to complete her review and act on any such information or authority within ninety (90) days. ARTICLE VIII LOAN REVIEW CONSULTANT (I) Within ninety (90) days, the Board shall employ a qualified consultant to perform - lO- Appendix p. 104 an asset quality review of the Bank. The consultant shall be utilized until such time as an ongoing internal asset quality review system is developed by the Board, implemented and demonstrated to be effective. Before terminating the consultant's asset quality review services, the Board shall both certifY the effectiveness of the internal asset quality review system, and receive prior approval from the Assistant Deputy Comptroller. . (2) Prior to hiring a consultant or entering into any contract with a consultant, the Bank shall submit the proposed terms of employment and the qualifications of the consultant to the Assistant Deputy Comptroller who shall have the power of veto. However, the failure to exercise such veto power shall not constitute an approval or endorsement of the proposed (3) The requirement to submit information and the prior veto provisions of this Article are based on the authority of 12 U .S.C. § 1818(b) and do not require the Comptroller to complete hislher review and act on any such information or authority within ninety (90) days. ARTICLE IX PRODUCTS AND SERVICES - EXISTING OR NEW (I) Within ninety (90) days, the Board shall prepare a written analysis of the payday lending program, vault cash program, and ATM sponsorship program which fully assesses the risks and benefits of these lines of business. This analysis shall include an assessment of the Bank's controls, procedures, MIS and management ofthese operations, and shall tie directly to the Bank's strategic plan. (2) Prior to the Bank's involvement in any new products or services the Board shall prepare a written analysis of said product or service. The analysis shall, at a minimum, include - II - Appendix p. 105 the following: (a) an assessment ofthe risks and benefits of the product or service to the Bank; (b) an explanation of how the product or service is consistent with the Bank's strategic plan; (c) an evaluation of the adequacy of the Bank's organizational structure, staffing, MIS, internal controls and written policies and procedures to identify, measure, monitor, and control the risks associated with the product or service; and (d) a profitability analysis, including growth projections and interest rate risk. (3) Prior to the Bank's involvement in the new product or service, a copy of the analysis shall be submitted to the Assistant Deputy Comptroller. ARTICLE X RISK MANAGEMENT (1) Within ninety (90) days, the Board shall develop, implement, and thereafter ensure Bank adherence to a written risk management program to include, at a minimum, the (a) identification of existing credit, interest rate, liquidity, transaction, compliance, strategic, reputation, price, and foreign currency translation risks, and a written analysis of those risks; (b) action plans and time frames to reduce risks where exposure is high, particularly with regard to credit risk, which impacts directly on liquidity, - 12 - Appendix p. 106 compliance, strategic, and reputation risks, as more fully discussed in the Report of Examination; (c) policies, procedures or standards which limit the degree of risk the Board is willing to incur, consistent with the strategic plan and the Bank's financial condition. This includes analyzing and limiting the risks associated with any new lines of business that the Board undertakes. The procedures shall ensure that strategic direction and risk tolerances are effectively communicated and followed throughout the Bank and should describe the actions to be taken where noncompliance with risk policies is identified; (d) systems to measure and control risks within the Bank. Measurement systems should provide timely and accurate risk reports by customer, by department or division, and bank wide as appropriate; and (e) procedures to ensure that Bank employees have the necessary skills to supervise effectively the current and the new business risks within the Bank, and procedures to describe the actions to be taken to address deficiencies in staff levels and skills. (f) The risk management program shall be consistent with the Bank Supervision Process booklet, EP-Sup, of the Comptroller's Handbook. (2) The Board shall ensure that the Bank has processes, personnel, and control systems to ensure implementation of and adherence to the program developed pursuant to this (3) Within one hundred twenty (120) days, the Board shall identify and appoint an - 13- Appendix p. 107 individual with demonstrated experience and skills in providing overall risk management to implement the Bank's risk management program. This individual shall report to the Board of Directors of the Bank and shall be independent of other Bank operations. Prior to the appointment of an individual to this position, the Assistant Deputy Comptroller shall have the power of veto over the appointment of this person. However, the failure to exercise such veto power shall not constitute an approval or endorsement of the proposed individual. (4) The requirement to submit information and the prior veto provisions of this Article are based on the authority of 12 U.S.C. § 1818(b) and do not require the Comptroller to complete hislher review and act on any such information or authority within ninety (90) days. ARTICLE XI CAPITAL PLAN AND HIGHER MINIMUMS (1) The Bank shall achieve by June 30, 2005 and thereafter maintain the following capital levels (as defined in 12 C.F.R. Part 3): (a) Tier 1 capital at least equal to twelve percent (12%) of risk-weighted assets; (b) Tier 1 capital at least equal to eight and half percent (8.5%) ofadjusted total assets. (2) The requirement in this Agreement to meet and maintain a specific capital level means that the Bank may not be deemed to be "well capitalized" for purposes of 12 U.S.C. § 18310 and 12 C.F .R. Part 6 pursuant to 12 C.F .R. § 6.4(b)(1 )(iv). (3) Within ninety (90) days, the Board shall develop, implement, and thereafter - 14- Appendix p. 108 ensure Bank adherence to a three-year capital program. The program shall include: (a) specific plans for the maintenance of adequate capital that may in no event be less than the requirements of paragraph (I); (b) projections for growth and capital requirements based upon a detailed analysis of the Bank's assets, liabilities, earnings, fixed assets, and off- balance sheet activities; (c) projections of the sources and timing of additional capital to meet the Bank's current and future needs; (d) the primary source(s) from which the Bank will strengthen its capital structure to meet the Bank's needs; (e) contingency plans that identifY alternative methods should the primary source(s) under (d) above not be available; and (f) a dividend policy that permits the declaration of a dividend only: (i) when the Bank is in compliance with its approved capital program; (ii) when the Bank is in compliance with 12 U.S.C. § 56 and 60; and (iii) with the prior written approval of the Assistant Deputy (4) Upon completion, the Bank's capital program shall be submitted to the Assistant Deputy Comptroller for prior determination of no supervisory objection. After this determination by the Assistant Deputy Comptroller, the Bank shall implement and adhere to the capital program. The Board shall review and update the Bank's capital program on an annual basis, or more frequently if necessary. Copies ofthe reviews and updates shall be submitted to the Assistant Deputy Comptroller. - 15 - Appendix p. 109 (5) The Board shall ensure that the Bank has processes, personnel, and control systems to ensure implementation of and adherence to the program developed pursuant to this ARTICLE XII CORRECT INFORMATION TECHNOLOGY SYSTEM DEFICIENCIES (I) The Bank shall immediately take all steps necessary to improve the management of the Bank's Information Technology Systems (ITS) activities and correct each deficiency cited in the Report of Examination or any subsequent Report of Examination. (2) Within ninety (90) days, the Bank shall ensure that the data processing manager has the necessary skills and experience to supervise effectively the ITS area. (3) Within ninety (90) days, the Bank shall implement effective ITS security and operations procedures as described in the Federal Financial Institutions Examination Council's 1996 Information Systems Examination Handbook, and Banking Circular Number 229, dated May 31, 1988. (4) Within ninety (90) days, the Bank shall develop an effective and independent internal ITS audit program. At a minimum, the ITS audit program shall be performed by an independent and qualified individual, and include fundamental elements of a sound audit program as described in the Federal Financial Institutions Examination Council's 1996 Information Systems Examination Handbook. (5) Within ninety (90) days, the Board shall appoint an Information Security Officer familiar with ITS operations. The Information Security Officer shall be responsible for reviewing and ensuring appropriate data security of the Bank. - 16- Appendix p. 110 (6) The Board shall provide a quarterly written progress report on each of the requirements ofthis article to the Assistant Deputy Comptroller. ARTICLE XIII VIOLATIONS OF LAW (I) The Board shall immediately take all necessary steps to ensure that Bank management corrects each violation of law, rule or regulation cited in the ROE and in any subsequent Report of Examination. The quarterly progress reports required by Article XIV of this Agreement shall include the date and manner in which each correction has been effected during that reporting period. (2) Within ninety (90) days, the Board shall adopt, implement, and thereafter ensure Bank adherence to specific procedures to prevent future violations as cited in the ROE and shall adopt, implement, and ensure Bank adherence to general procedures addressing compliance management which incorporate internal control systems and education of employees regarding laws, rules and regulations applicable to their areas of responsibility. (3) Within ninety (90) days of receipt of any subsequent Report of Examination which cites violations of law, rule, or regulation, the Board shall adopt, implement, and thereafter ensure Bank adherence to specific procedures to prevent future violations as cited in the ROE and shall adopt, implement, and ensure Bank adherence to general procedures addressing compliance management which incorporate internal control systems and education of employees regarding laws, rules and regulations applicable to their areas of responsibility. (4) Upon adoption, a copy of these procedures shall be promptly forwarded to the Assistant Deputy Comptroller. - 17 - Appendix p. 111 (5) The Board shall ensure that the Bank has policies, processes, personnel, and control systems to ensure implementation of and adherence to the procedures developed pursuant to this Article. ARTICLE XIV PROGRESS REPORTING - MONTHLYIQUARTERLY (1) The Board shall submit monthly/quarterly progress reports to the Assistant Deputy Comptroller, Lubbock Field Office, 5225 South Loop 289, Suite 108, Lubbock, TX 79423. These reports shall set forth in detail: (a) actions taken since the prior progress report to comply with each Article of the Agreement; (b) results ofthose actions; and (c) a description of the actions needed to achieve full compliance with each Article of this Agreement. (2) The progress reports should also include any actions initiated by the Board and the Bank pursuant to the criticisms and comments in the Report of Examination or in any future Report of Examination. (3) The first progress report shall be submitted for the period ending 12/31/04 and will be due within thirty (30) days of that date. Thereafter, progress reports will be due within thirty (30) days after the quarter end. - 18- Appendix p. 112 Article XV CLOSING (6) Although the Board has agreed to submit certain programs and reports to the Assistant Deputy Comptroller for review or approval, the Board has the ultimate responsibility for proper and sound management of the Bank. (7) It is expressly and clearly understood that if, at any time, the Comptroller deems it appropriate in fulfilling the responsibilities placed upon himJher by the several laws of the United States of America to undertake any action affecting the Bank, nothing in this Agreement shall in any way inhibit, estop, bar, or otherwise prevent the Comptroller from so doing. (8) Any time limitations imposed by this Agreement shall begin to run from the effective date of this Agreement. Such time requirements may be extended in writing by the Assistant Deputy Comptroller for good cause upon written application by the Board. (9) The provisions of this Agreement shall be effective upon execution by the parties hereto and its provisions shall continue in full force and effect unless or until such provisions are amended in writing by mutual consent of the parties to the Agreement or excepted, waived, or terminated in writing by the Comptroller. (10) This Agreement is intended to be, and shall be construed to be, a supervisory "written agreement entered into with the agency" as contemplated by 12 U .S.C. § 1818(b)( I), and expressly does not form, and may not be construed to form, a contract binding on the OCC or the United States. Notwithstanding the absence of mutuality of obligation, or of consideration, or of a contract, the OCC may enforce any ofthe commitments or obligations herein undertaken by the Bank under its supervisory powers, including 12 U.S.C. § 1818(b)(l), and not as a matter of contract law. The Bank expressly acknowledges that neither the Bank nor - 19- Appendix p. 113 the OCC has any intention to enter into a contract. The Bank also expressly acknowledges that no OCC officer or employee has statutory or other authority to bind the United States, the U.S. Treasury Department, the OCC, or any other federal bank regulatory agency or entity, or any officer or employee of any of those entities to a contract affecting the OCC's exercise of its supervisory responsibilities. The terms ofthis Agreement, including this paragraph, are not subject to amendment or modification by any extraneous expression, prior agreements or arrangements, or negotiations between the parties, whether oral or written. IN TESTIMONY WHEREOF, the undersigned, authorized by the Comptroller, has hereunto set her hand on behalf of the Comptroller. lsi ([)e6ra)l. qarftJtuf 10/25/04 Debra A. Garland Date Assistant Deputy Comptroller Lubbock Field Office - 20- Appendix p. 114 IN TESTIMONY ~REOF, the undersigned, as the duly elected and acting Board of Directors of the Bank, have hereunto set their hands on behalf of the Bank. Susan Couch 10-25-04 Date Jane Slemp Burgess 10/25/04 Date Terry J. Spears 10-25-2004 Date Jim Pennington 10-25-04 Date Campbell Burgess 10-25-04 Date - 21 - Appendix p. 115 , , ,.. ,, FEDERAL DEPOSIT INSURANCE CORPORA1l0N WASlllNGTON, D.C. ) Til the Malter of ) NOTICE OF INTENTION TO ) REMOVE FROM OFFICE AND . ) PROHIBIT FROM FURTHER CORNELIUS CAMl'BELL BURGESS, ) PARTICIPATION AND Individually and as an institution-affiliated party of ) NOTICE OF ASSESSMENT OF ) ClVJLMONEY PENALTY, HERRING BANK ) FINDINGS OFFACT AJ>.'J) AMARILLO, TEXAS ) CONCLUSIONS OF LAW, ORDER ) TO PAY, AND NOTICE OF (INSURED STATE NONY.E!llBER B'\""1<:) ) HEARlNG ) ) FDIC~ 14-0307:: and ) l'DIC-14-030Bk ) The Federal Deposit Insurance Corporation ("FDIC'? has detcnnincd l~at Cornelius Campbell Burgess ("Respondcnt'?, individually. as an officer, director,"and institution-affiliated party of Herring Bank, Amarillo, Texas ("Baclt"), engaged or participated in un.:;afe or unsound banking prectices, committed or cngaged in acts, omissions, or practices which constitute breaches 0f.his fiduciary duties to the Bw, and/or violated law or regulation; that the Bank suffered financial loss and Resporuient received financial gain or ether benefit as a result of such practices, breaches of fiducia.'Y" duties and/or violations; and that such.practices, brcat.:J.es of fiduciary duties and/or violations demonstrate Respondent's personal dishonesty or wilL."'UI. or continuing disregard for the safety or soundness of the Bank" The FDIC has also detennined that Respondent's reckless unsafe or unsoundprocticcs, breaches of fiduei llfy duties and/or violations of law or regulation were part of a pattern and practice of misconduct that resulted in pecuniary gain or other benefit to Respond~t and/or PLAINTIFF'S EXHIBIT '>1 Appendix p. 116 ; .. ,-- ~ -caused or was likely to cause more than a mDlimalloss to the Bank. The FDIC, therefore, institutes 'Ibis proceecfing for the pwpose of determining whether an -- , appropriate ORDER OF REMOVAL FROM OFFICE AND PROHIBITION FROM FURTHER ,. r PARTICIPAllON ("ORDER O~ REMOVAL AND PROHIBIDON") should be issued against ....: Respondent pursuant to the provisions of 12 U.S.C. § 1818(e),removingRcspondentfromoffice .i- : and prohibiting him ~m further participation in the conduct oithe affairs of~ Bank and any l-_ ~,. other insured deposito:ry institution or organization listed in 12 U.S.C. § 1818(e)(7)(A), without -, the prior written coosent ofthe FDIC and such other appropriate Federal fimmcial institutions regulatory agency, as that term IS defined in 12 U.S.C. § 1818(e)(7)(D): - Further. ~e FDIC institutes this proceeding fOI the assessment of civil money penalties pursuant to the provisions of 12 U.S.C. § 1818(i)(2)(A) and (B) against Respondent The FDIC hereby issues this NOTICE OF lNTENT TO REMOVE FROM OFFICEM'D PKOHIBIT FROM FORmER ~ARTIC1PATION (IINOTICE TO REMOVE AND PROHIBIT') pursuant to the provisions of12 U.S.c. § 1818(e) and this NOTICE OF ASSESSMENT OF . AND CONCLUSIONS OF LAW, ORDER . CIVIL MONEY PENALTY, FINDINGS OF FACT TO PAY. AND NOTICE OF HEARING ("NOTICE OF ASSESSMENT',) pursuant to 12 U.S.C. i r! I § 1818{i) and It C.F.R. Part 308 and alleges as follows: FINDINGS OFFACf JurisdictWn and Background 1. At all times pertinent to the charges herein, the Bank: was a coIpOration existing and doing business tmderthe laws of the State' of Texas. having its principal place of business in Appendix p. 117 I , I " i' I, ~i :! I .Amarillo, Texas, 1 'j . I'! 2. At all times pertinent to the charges herein, the Bank has been. an insured State I; nonmember bank. as defined in 12 U.S,C. § 1813(e)(2) and, as such. is subject to the Federal 'I 'I Deposit Insurance Act (UAcf'),12 U.S.C. '§ 1811 etseq.• the Rules and Regulations of the FDIC. 11 !';, ;1 12 C.F.R Chapter m. and the laws ofthe State ofTexas. II 3. At ~ times pertinent to the charges herein, Respondent was an institution- I"': " i affiliated party of the Bank as that tennis defuied in 12 U.S.C. § IS13(u). ~. 4. The FDIC has jurisdiction over the B~ the Respondent, and the subject matter of this proceeding. 5. The FDIC is the "appropriate Federal banking agency" with respect to the Bank I',i :i within the meaning of12 U.S.C. § 1813(q)(2). 6. The Bank is wholly-owned by Herring Bancolp, Inc., Amarillo Texas C'IIBI"). 7. The Burgess tamUy owns or controls approximately 80 percent of the outstanding stockofHBl 8. The members of the Bank's Board of Directors ('"Board"), which includes Respondent, his father and sister, col.leetively own 58 percent ofImI's voting stock. Respondent's father, Charles Coney Burgess. was at all times relevant to this actio~ Cbainnan of the Board and Chakman of the Board of Directors ofBBL 11. In. 2002, the Bank appointed Respondent as its Chief Executive Officer and Appendix p. 118 President. 12. At all times pertinent to the charges Jierein, Respondent held the positions of President, Chief Executive Officer, and director at the Bank until his resignation On April 2, 2012, as President and lDl.1i1bis June 19,2012 resignation as ChiefBxecutive Officer. ,. 13. Respondent remains a current director on the Bank's Board and an officer for i HBl Respondent's Unsafe or Unsound Expense ReimhuTsemellt Practice i and Breaches of Fuluc.iary Duty . ! I t I 14. Between November 2009 through April 2012 (the "Relevant Period"). I ! Respondent repeatedly engaged in unsafe or unsound practices and breached his fiduci8IY duty to .r !I : the Bank by causing the Bank to pay his personal expenses, including the expeDSes ofms !. girlfrlend Susan Taylor ("Taylor"), who was not a Bank employee, without:full and 1ruthfu1 disclosure to, or illfonned approval from the Board. 15. During the Relevant Period, Respondent repeatedly used multiple Bank-owned I. :' I' , credit and debit cards issued in Iris name, Taylor's name, and in the name of other Bank !- :.: ~; employees {coUectively "Bank-Owned Cards") to pay for his and Taylor's personal expenses, ! which were charged to the Bank without adequate or truthful support for the business nature of r,'r0 the expenses. 16. Until at least July 28, 2011 Respondent routinely did not retain sales receipts for the charges he made on his Bank-Owned Cards, retaining receipts for only about 10 percent of 'his chargeS (by dollar volum~), 17.. More often than not, Respondent failed altogether to document or otherwise Appendix p. 119 evidence the propriety ofms charges; and what documentation he did pIovide was :fiUse, misleading, vagu~ or incomplete, and as such, unreliable and effectively useless in allo$g the Bank. its auditors. or examiners. to ascertain whether Respondent's charges were for legitimate business pmposes, or for personal pmposes. 18. The Bank paid for all ofResponde.nt"s expem;es that were charged on the Bank.- Owned Cards issued to hlm. non-employee Taylor, and other Bank employees, including those mcurred for his persoJ:!Bl benefit 19. During ~e Relevant Period, Respondent ro~y used the Bank's cash-out tickets, at his discretion; to withdraw:Bank cash without maintaining any receipts or providing adequate or trutb:fuI supportfor the business nature of the expetlSe8. 20. . To cause the ~ank pay for his personal expenses, Respondent self-approved, and instructed employees to reimburse, his expenses or pay his BSDk-Owned Card charges without sufficient sppport for the business nature of the expenses or prior approval from the Banlc: 21. By way of example only and without any limitation, in email exchanges dated February 19 and 20,2008, between Bank employees Althea White and Angela Davis. Ms. Davis noted that ''1 have the stub part of bill but I have ~o clue what was bought." 22. Tn response, Ms. White explained, "I am not allowed to give you the top part" 23. Ms. White went on to explain, "Campbell said that he and [Senior Vice President of Operations] Scarlette [Blair] worked it out where youj~ pay the bill. He doesn't want that infonnation to leave the floor." 24. '!he emaiI went on to state that "[h]e said to get with Scar1ette [Blair] and see how Appendix p. 120 '.1 ,!. . to pay them." II 25. During the Relevant Period, Respondent also made false or misleading entries in ··: . · . records provided to the BaDk in order to portray legitimate business purposes for his personal charges. ;. · 26. During the Relev~t Period, Respondent misled the FDIC, Texas peparfment of Banking ("TDOB"), and the BBDk's Board about his misuse of Bank-Owned Cards. the number of~anlc:-Owned Cards in his name, and Taylor'S expenses and her Bank-Owned Card. 27. Respondent's consistent use of Bank-Owned Cards and cash withdrawals during the Relevant Period to fund personal expenses, and his deliberate failure 10 maintain meaningful documentation ofbis expenses both were unsafe or unsound bankiDg practices and breaches of his fiduciary duty to the B~. 28. To the extent that the Bank's payment of these personal charges and subsequent reimbursement by Respondent could be characterized as loans, Respondentvio1ated Regulation o. 29. Following are examples of some, but not all of Respondent and Taylor's persooal charges on Bank-Owned Cards. 30. On December 24, 2009. Christmas Eve, Respondent charged $1,600 to aBank- Owned Card for a purchase at Diamood Creations mNew York City. 31. Diamond Creations is a New York jeweler. 32. The Bank paid the Diamond Creations charge in December 2009. 33. The Ja.n.wuy 2010 Bank-Owned Card statement claims the business purpose of the Appendix p. 121 purchase to be ''business development" i 34. Respondent did not reimburse the BaDk f~ the Diamond Creation expense until I II over two years after the Bank paid the charge. I I I I ~ 35. On Febnwy IlJ 2011 JRespondent charged $420 to a BaJJk-Owned Catd for 12 "buddy training" sessions at Amarillo Athlete. ! " 36. The Bank p~d the Amarillo Athlete charge. 37. A notation on the credit card statement states that the charge was "for Susan Taylor." 38. The Februaxy charge is one of ten Amarillo Athlete charges on Bank-Owned ,. :. Cards issued to Respondent or Taylor incurred in 2011. Many of the receipts cany the notati0ll: j for "CCB" - Respondent Cornelius Campbell Burgess - and "Susan Taylor". 39. The Bank paid Amarillo Athlete charges'totaling $3,570. 40. On August 12, 2010, Respondent cQarged $169 on one ofbis Bank-Owned Cards for textbooks shipped to Taylor Burgess, Respondent's son. 41. The September 2010 Visa Statement notates "supplies," but the invoice states "Biology•.• Geometry ••• [and] World History.. : Textbooks." 43. On November 18,2010, Respondent charged $800 to one ofms Bank-Owned Cards for "Googlc tRoss Koplin." 44. The Visa statement provided by Respondent reflects a riotation for the charge of t'Business development.'· Appendix p. 122 .' 46. Ross Koplin is a Colorado criminal defense attorney who specializes in motor vehicle offenses. ! ! i. 47. After the Bank paid Koplin, the Bank. also paid $175.28 for a Colorado traffic . i I ticket Thus, it appears that the payment to Koplin was for legal services relating to the Colorado ~.' traffic ,ticket and. not a business development expense. 48. On atleast:five occasions before July ~8, 2011. Taylor accompanied Respondent .on Bank travel at Bank. expense. On those five occasions. Taylor's travel expenses were charged on a Bank-Owned Card, and the notation on the Visa statement falsely noted that travel was for "CCB" - Respondent Cornelius Campbell Burgess. 49. On each occasion, there were two identical cbarges on Bank-Owned Cards for .' "j 50. On each occasion, one ticket was for Respondent and one ticket was for Taylor. 51. The travel charges occurred during 2010 and were dated JUDe 14.23, and 24 and July 7, and 9. 53. On many other occasions, Taylor accompanied Respondent on Bank-related travel and Respondent or another Bank employee cbarged Taylor's travel expenses to a Bank-Owned -, Card. 54. Respondent made numerous charges on Bank-Owned. Cards from late 2009 (that the Bank paid in Janumy 2010) through 2011 to Raffkinds. an Amarillo clothing store, totaling Appendix p. 123 .l" ,I . over $1,600.. 55. On 1b.e Vis~ statements most of the Raffkinds charges were unannotated, but a few ' , , had the notation "stationery supplies." I,', ~ 56. The Bank paid the Raftkinds charges. 57. Other examples of expenses with notations containing the questionable nature of a I Bank expense include, but are not limited to: $733 at TJ Maxx:; $1,130 arid $1,641, respectively. to World Market and United Supermarkets (mcluding charges for items such as toothpaste, , uncooked meat, eggs, produce, and wine); over $6,600 for expenses relating to 12 trips to Chattanooga, Tennessee, where Respondent's son, Taylor Camp~eU, attended boarding school; over $11.000 in charges to Tr~n Auction Resolutions; in 2010 and 2011, 17 purchases from '!i Worley Auction and Appraiser totaling over $57,191; over $426 in animal care products and services (including veterinaJy services and a dog leash); a $1,650 charge from what appears to be i. Scholastic Tours; and products and services relating to Respondent's home. 58. Although there are only a few receipts from Tranzonand Worley. receipts that do exist describe a Variety of expenses that do not appear to be legitimate business ~enses, such as a stereo receiver, outdoor furniture, and outdoor firePlaces, 59. The Bank. paid all of the charges descrlbed above. The 2010 Bank Examination 60. On December 13, 2010, tho FDIC began an examjnauon of the Bank ("2010 Examination"). The 2010 ·Examinationresulted in a d~wngrade in ihe Management component from 2 to 3 due to, among other things, a lack of control over Respondent's expenses and an. Appendix p. 124 ••• 1 . I .. inadequate Conflicts of Interest Policy. j, ! 61. Specifically, the 2010 Examination found the Bank's ratio ofnoninterest expense to average assets was 4.13 percent, which placed the Bank. in the 92111 percentile of its peer group. The Bank's high. noninterest expenses arc ~butable, at least in part, to the Bmk's uncontrolled expense spending. including expenses the Resp~ent incurred or were incuIred on his behalf. I· ;. 62. On Febrwuy 24, 2011, the FDIC and the mOB met:Mth the Board to discuss the I !-. :findings of the 201~ Examination (''FebnlaIy 24, 2011 Meeting"). \., r 63. ~ ~e February 24, 2011 meeting, the FDIC and the·1pOB infunned the Bank's Board that Respondent obtained $38,800 for unsubstantiated expenses using cash-out tickets in 2010 while using seven Bank-Owned Cards for various p~s. 64. The FDIC and the mOB also infouned the Boaro that they sho~ld .immediately pJ.ace controls on Respondent's expenses, order a forensic audit on ~enses from 2008 through l I- I·. 2010, promptly obtain reimburseIQ.eDt for all 2010 cash-out tickets without receipts to support the I i !.! business purpose of such expenses, and obtain reimburseme.nt for any employee expenses ~ t incurred for the employee's personal bep.efit I 65. On March 8, 2011, Respondent met"with the FDIC. 66. Respondent stated during the March 8, 2011 meeting that bcca~e he could not j ., locate receipts for the cash-out tickets, the $38,800 in cash-out tickets would be added to his 2010 W-2 as income for that year. 67. Also, during the meeting on March 8, 2011, ~ondent promised to implement all 2010 examination recommendations, including controls on Respondent's expenses. Appendix p. 125 . " .. " Taylor's Bank-Owned Ctl1'~ ., " II j 68. On March 21,2011, Respondent manged for the issuance of a Bank-Owned Card l . I I I I to Taylor, a non-Bank employee. 69. Taylor'S application for her Bank-owned credit card includes the notation that she was the ccSenior V P of Assistants" for the Bank. 70. The Bank's Human Resources Department subsequently confumed to FDIC examip.ers that Taylor was never a Bank employee. ~: 71. At all times pertinent to this proceeding, Bank policy 'limited the issuance of . I Bank-Owned Cards to full time Bank employees with a business nee~ for a credit card. 72. Initially, Taylor's Bank-Owned. Card had a credit limit of $5,000. 73'. In consecutive months. Taylor's Bank-Owned Card's crel;lit limit was raised to $7,500 and then to $15,000, with no apparent Board or Bank supervisor appro~ or oversighl , , 74. On March 22, 2011, Bank Senior Vice President Scarlett Blair (''Blair'~ inf'omled the Board in writiDg that Respondent planned to cancel four of his Bank-Owned Cards. 75. Blair's letter regarding the planned cancellations did not inform. the Boanl of issuance of Taylor's BaDk-Owned Card or her application with the false infoJlllationregarding her emploJ'IUcrit by the Bank as a Senior Vice President of AsSistants. ' 76. Expenses charged on Taylors Bank-Owned Card totaled approximately $48,000 during 2011 and $9,000 in 20 12 before it was deactivated in Aprll2012. Tile June 2011 Memorandum. o/Understanding 77. On J1DJ.e 14,2011, a Memorandum of Understanding ("MOU") between the Bank, Appendix p. 126 the FDIC. and the TDOB became effective. 78. MOU Prqvision #3 required a forensic audit for the period 2008 through 2010 that I ~I identified and totaled non-Bank related exptDSeS incurred by the Bank on behalf of any employee .: :~ and required the Board to submit ~ the FDIC and the mOB a record of full reimbursement by the employee for any non-Bank expenses. . 79. During 3: Board meeting held on July 28, 20 II, the Board conducted its. first review of Respondent's expenses. 80. During are1ated July 28,2011 EXecutive B081u session and in response to a question whether a Bank-Owned credit card had been isSued to Taylor, Respondent answered. "No". 81. Respondent knew or should have known ~ Taylor obtained and was using a Bank-Owned Card. 82. At the meeting, Blair explained to the Board outside ofRespondenfs presence ~t Respondent made personal charges on Bank-Owned Cards "to test the Bank's payment card systemL],' but "reimburses the bank for all personal charges.,o 83. Respondent made minimal reimbursement of personal charges (approximately $4,000) before the FDIC and the mOB demanded repayment of all non-Bank expenses. 84. Repayments that Respondent macte prior to the FDIC and the mOB's demand for full reimbursement represented a small fraction of non-Bank expenses Respondent charged aD B-ank-Owned Cards. 85. Doring '!he July 28,2011 Board Executive Session, Blair discussed l?everal credit '. Appendix p. 127 .. '. . ., .. card charges made by Respondent that appeared to be personal in nature. j' I 86. One such charge involved one of Respondent's ~ trips to Chattanooga, Tennessee, purportedly for a student credit card program.. 87. Respondent's trips to Chattanooga, Tennessee cmresponded to times when Respondent's son attended school in Chattanooga, TeDllessee. 88. Respondent lind/or a subsidiary ofHBI controlled by the Burgess family, i'· Financial Payments, reimbursed the Bank for a fraction oi"the charges incuned o~ !riPs to I , Chattanooga. 1 :-" I 89. Blair eXplained that the "health and fitti.ess" entries on Respondent's credit card t j. statements were Bank expenses because "CEO Burgess [has] tremendous pain in his neck and I back" and the expenditures were for "a masseuse and trainer." i . I I ,I 90. Blair did not explain 'that the ''health and fitness" expenses paid by the Bank were, i .I at least in part, for the benefit of Taylor. j" I 91. The Executive Board also discussed, outside of Respondent's presence, authorizing payment ofRespondent's Executive MBA program ("EMBA"). althouglt by this time Respondent had been charging the expenses to the Bank (totaling moreihan $100,000). including Taylor's expenses in accompan,mg Respondent, for over 13 months: 92. After Respondent retnmed to the Boani meeting, the Bqard asked why he had ttavelled to Singapore in July 2011 for bis EMBA. 93. Respondent explained 'that the travel to the school's Singapore campus was a requirement of his EMBA. Respondent did not explain a side trip from the EMBA required Appendix p. 128 ... Singapore trip that he and Taylor took in July 2011 to Hanoi. Vietnam, that cost the Bank at least $1,672. 94. Likewise, Respondent never told the Board that in August 2011, after an EMBAM required trip to the school's London campus, he and Taylor were planning a side trip to Paris that ultimately cost the Bank at least $1,218. 95. At the July 28, 2011 meetin& the Board. also raised the issue o~having an assistant accompany Respondent on travel at Bank's expense. 96. Respondent explained that he ne¢cd an assistant (i) to organize the roughly 150 emai1s he received daily (thereby exposing a nonMBank c;mPloyee to Bank business); (ii) to bring to his "attention matters that [sic] ne¢ing his immediate attention"; and (iii) to be able to discuss Bank matters in real time with someone who knew what was going on because of the time Jag with Amarillo and his demanding school day. 91. Respondent did not disclose that his "assistant" was his girlfriend Taylor. 98. Contrary to his statement to the Bank's Board claiming that Taylor's expenses were justified as necessary business expenses, Respondent subsequently ex.pJained to the FDIC and the mOB in February 2012 that the Bank had a policy of paying travel expenses for !i significant other who accompanied a B~ employee on legitimate business navel. 99. Respondent did not produce this purported policy in response to FDIC and mOB requests, and later retracted his statement that the Bank bad such a policy. 100. During the July 28, 2011 meeting, Respondent told the Board that the Uciversity of Chicago paid for EMBAlod¢ng. Appendix p. 129 • _, :.<1,,:. .' .. I -.\ .101. Respondent and/or Taylor repeatedly used BBDk-Owned Cards to pay for lodging :. -, • ,while attending EMBA courses. I.- I~' ! 102. . 103. The Bank routinely paid 'these BMBA lodging charges. At the conclusion of the July 28,2011 meeting, without reviewing or evaluating i· I I I I II t any of Respondent's actual expenses based on the business or personal nature of each expense. i; !'" .:':. the Board: (1) approved a 2011 expense budget of $127.000 for Respondent by annualizing his rI- r year-to-date expenses; (2) retroactively approved all of Respondent' s 2011 Bank·Owned Card expenses; (3) retroactivCiy approved EMBA-related expens~ that 'the Bank 'paid o~ the prior . 13 months; (4) retroactively approved Taylor's travel expenses as the Bank-related expenses of 1- an assistant; and (5) directed Respondent to abstain from making personal purebases on Bank- i ,. ; i Owned Cards. I IJ 104. There is no indication in the Board minutes that Respondent's father. ChaiDDBn of ! r I 'the Board, recused from the vote. ! : 105. Despite the Board's. Wrective, Respondent continued to make personal charges on. i~ : Bank-Owned Cards. i !, TIle Pailgett, Strntemann & Co. ForensicAudit ,- i I 106. On August 8, 2011, the Board retained Padgett, Stratemann & Co. ("PSC") to I ~ ~ conduct the forensic audit required by MOU ProvWon #3: ~ i· 107. At a September 2Q. 2011 Exeeuti.ve Board Meeting, the minutes state "certain business related expenses relating to Mr. Campbell Burgess were not adequately documented and in some C8Se3 the Bank's files did contain appropriate records and receipts supporting the' Appendix p. 130 .1 I I·i I business related use of such expense advances. The Board aclcnpwledges that SU?h expense i advances were made exclusively for bUsiness-related purpos~. however, because certain of these I business-related expenses Were not adequately documented, Mr. Campbell Burgess has agreed to remitS73,900 t9 the Bank." 108. The Board never approved the addition of $38,800 to Respondent's 2010 income in lieu ofins repayment of his 2010 cash advances. 109. At aNovem.ber 1,2011 Board meeting with the FDIC and the mOB, Respondent stated that he repaid all cash. advances for 2008 and 2009 obtained through cash--out tickets totaling $73,900 and tbathe claimed the $38,800 of20l0 cash advances as income onhis.20l0 W-2. 110. During a December 19,2011 conference call with the FDIC and the mOB. the Bank's ~OU Compliance Committee noted that the PSC forensic audit had been delayed by a lack of ad~ documentation for ~008 tbro~ 2010 expenses. 111. On Januazy 25, 2012, the Bank received a draft foi:ensic audit from PSC rJ)raft . PSC Audit") which fo~ among other things, Respondent directly charged a total of $476,814 t9 the Bank, including $330,855 on 12 Bank-Owned credit cards, $33,259 on Bank-Owned debit cards, and $112,700 using cash-out tickets from 2008 1hrough 2010: 112. The Draft PSC Audit further found that Respondent producedrcceipts for only $33,388 of the $476,814 ofex.penses to support such expenses as legitimate Bank expenses. 113. The Draft P~C Audit determined. that $18,866 of credit card uges, which were made by or on behalf of Respondent, had an available receipt to support non-bank expenses; that Appendix p. 131 " ; . $327;1.73 ofRespondent's debit and crectit card charges lacked receipts; and listed $149,598 of direct credit and debit charges of Respondent without receipts as "questionable!' 11~. The DraftPSC Audit found that B1l additional $467,268 was charged on Bank- Owned Cards of other employees, including Respondent's Bank: assistants, and tlnit many of :. theSe charges relate to Respondent 115. Unlike Respondent's direct charges on Bank-Owned Cards issued to Respondent, " the majority oftb.e charges on Bank-Owned Cards is~ to other Bank employees included receipts, .i 116. . Many of these receipts for charges on Bank-Owned Cards issued to other Bank employees show that the expenses benefited Respondent and not the B8IIk. 117. On February 1, 2012, the Board ratified. ~ildent·s ,charges from 2008 through 2010 as "busjn.ess expenses" based aD! (i) two letters from Doug Conder C'Condet'), a certified public accountant who also s~ed as CPA for Respondent and HBI, and who was a tenant of HB1, opining that the absence of receipts supporting a business pUIpose bad survived IRS .scrutiny and recommending that "the Board retroactively approve Respondenfs expenses ' . [the Board] bad reason to believe otherwise"; and (Ii) a memorandum from Blair acknowledging a small number of personal charges ($4,695.22) on Respondent's Bank-Owned Cards that were within the "nonna! rmge of mor" and stating that all remajning charges were business in nature, and complied with the expense policy in effect when they were made. , ' 118. On February 1, 2012. the Board also passed a resolution that in the future no expense will be reimbursed ifit is not accompanied by a receipt Appendix p. 132 .. ' 119. There is DO indication in the Board minutes that Respondent's father. Chainuan of the Board. recused from the vote. 120. On Februmy 1. 2012, in accordance with Blair's memorandmn, Respondent reimbursed $4)695.22 to the Bank. Tile 2012 Bank Examination . I 121. At the February 13, 2012 joint examination of the Bank. (,,2012 Examination'1, the Bank's management component was downgraded from a 3 to a 4 because ot: among other things, the Board's continued lack of controls over Respondent's expenses, including the issuance of a Bank-Owned Card to non~ployee Taylor, and continued fhll~ to conduct a line item analysis of Respondent's expenses and obtain full reimbmsement for non-Bank expenses, as required by MOU Provisions #3. 122. The 2012 Examination also noted that Taylor's credit card charges were shown under Respondent's expenses - rather than identifYing Taylor's Bank-Owned Card charges separately - in monthly expense reports that the Board reviewed. 123. On April 2, 2012, Without reviewing the nature of Respondent's individual expenses as required by MOU Provision #3, the Boan! once again retroactively approved all .expenses of Respondent from 2008 tbrough2010 shown in the draft forensic audit after reviewing new IRS analyses by Conder and tax attomey Bill Hoy C'Hoy"), plus the prior recommendations of Conder and BImr. 124. Hoy opined regarding the sufficiency of the Bank's expense rem.bursem.ent "system" for m.S PUIpOses) concluding that the "system" was sufficient for IRS purposes. Appendix p. 133 ., " '. . ·. I I 125. Conder .opined that the Bank's reimbursement of expenses without receipts was ·~. not a GAAP violation. 126. There is no indication in'the Board minutes that Respondent's father, Chairman of the Board, recused from the vote. s I s. j. 127. On Apru2, 2012, based on a management study that recommended the positio~ of !' ~ Chief Executive Officer and President be split mto two positions, Respondent resigned as Bank I f28. On April 12, 2012, PSC issued its final forensic audit report. I 129. The final PSC report conclude "Other Documentation Per Bank Policy." PSC based its conclusion ~ the Board's February 1 · and Apri12. 2012 retroactiye approvals of Respondent's 2008-2010 expenses. "However. r ! because receipts were not available for these disbuxsements ~d because such expenses can be considered bank expenses, (pSC was] unab~e to concretely identify that these expenses were either bank or no~bank expenses." 130. On May 1, 2012, the Board met at the mOB office with the FDIC and TDOB to discuss the findings of the Joint IDOB-FDIC 20 12 Examination. '. 131. Duringtbis meetin& the FDIC noted that the 2012 Examinatio~ uncovered Taylor's Bank-Owned Card, her credit card application, and several overseas air fare charges. 132. Also during the May 7,2012 meeting, Respondent told regulators and the Board that he thought Taylor had a personal credit card instead of a Bank-Owned Card. Appendix p. 134 133. The 1DOB and the FDIC recommended that the Board review Respondent's expenses prior to 2008 and through 20~2, and that Respo.Udent promptly reimburse the Bank for . all non-Bank related expenses. 134. On June 19,2012, R!:spondent resigned as ChiefExecutive Officer of the Bank but remained on ~e Board. He also resigned from all Board committees. 135. On July 20, 2012, the mOB and the FDIC jointly notified the Board, in writing, that aU non-Bank expenses paid on behalf ofRespondent during bis tenure at1he Bank should be pIomptly reimbursed. TI,e Bank's Settlement with Respondent 136. On October 30, 2012, the Board authorized new directors Robert Templeton ("Templeton") and William. McKinney \McKiDney") to resolve Respondent's expense issues and negotiate with Respondent regarding any required payment. 137. After revie)Ving Respondent's expenses, including the $149,598 identified by PSC iI ,. as "questionable," directors Templeton and McKinney determined that approximately $180,000 in expenses wammted reimbUISement to the Bank. 138. On December 7, 2012, directors Templeton and McKinney reached a signed settlement agreement with Respondent to reimburse the Bank an additional $238,650 for expenses that Respondent charged and 'the Bank paid from 2005 through 2012. 139. On December 7, 2012, Respondent paid the Bazik $238,650, bringing his total reimbursement to the Bank to $319,505 between October 2011 and December 7.2012. . . CONCLUSlO~S OF LAW 140. Paragraphs 1 through 139 are re-alleged and incorporated helein by reference: Appendix p. 135 ••• • • • •1 ,J . -." . ' . . ": . 141. By reason of Respondent's foregoing acts, omissions and practices, Respondent' ,has recklessly engaged in unsafe or unsound practices. 142. As a result of the foregoing acts, omissions, or practices, Respondent has breached bis fiduciary duty as an officer and directOr, of the Bank. 143. To the extent that the Ban!c's payment of Respondent's personal charges and subsequentreilpbursement by Respo~t could be characterized as loans, Respondent violated Regulation O. 144. Regulation 0 requires that loans to Bank insiders be extended ICon substantially the Same tCnns (including interest rates and collateral) as, and follQwing credit underwriting I procedures that are not less stringent than, those prevailing at the time for 'compamble I I transactions by the bank with other persons that are not covered by [Regulation 0] and who are not employed by the bank.,.. 12 C.F.R. § 215.4(a). 145. Because the Bank did not make comparable loans to non-Bank employees at,that . time, Respondent's personal cbarges and cash withdrawals were extensions of credit by the Bank I ~ on preferential tenns and therefore violated Regulation O. I ! I 146. As a result of Respondent's foregoing acts, omissions, or practices and breaches r .f " of fiduciary duties, the Bank suffered losses. ;, 147. As a result of his foregoing acts, omissions, or practices and bzeaches offiduciaty duties, Respondent received financial gain or other benefit , I I, 148. RespOndent's foregoing acts, omissions, or practices demonstrate a willful or I : continuing disregard for the safety or soundness of the Bank and personal dishoD,eSty. ' Appendix p. 136 •• I !. NOTICE OF ASSESSMENT OF CIVIL MONEY PENALTY, FlNDINGS OF FACT AND CONCLUSIONS OF LAW 149. Paragraphs. ~ through 148 are restated and incorporated herein by reference and . constitute FJNI)INGS OF FACT AND CONCLUSIONS OF LAW for the pmposes of this NOTICE OF ASSESSMENT. . 150. By reason of the allegations contamed herein. Respondent has recklessly engaged , in unsafe or unsound practices in conducting thc affairs of the Bank within the meaning of 12 . ~ EO U.S.C. § 1818(i)(2)(B)(i)(TI). i 151. By reason of the allegations contained herein, Respondent has breaclted his fiduciaIy duties to the Bank within the meanmg of 12 U.S.C. § 1818(i)(2)(B)(i)(III). 152. To the extent that the Bank's payment of Respondent's personal charges and subsequent reimbursement by Respondent could be characterized. as loans, Respondent violated Regulation O. Therefore. Respondent bas violated law or regulation within the meaning of semion 8(i)(2)(A)(i) oftbeAct, 12 U.S.C. § 18~8(iX2)(A)(i). 153. By reason of the allegations contained herein, Respondent's practices and breaches are part oia pattem of misconduct witlrin the meaning of 12 U.S.C. § 1S'l8(i)(2)(B)(ii)(I). . 154. By reason of the allegations contained herein, Respondent's prncl:ices and breaches resulted in pecuniBlY gain or other benefit within the meanmg of 12 U.S.C. § 1818(i)(2)(B)(*ri)(ID). 155. By reason of the allegations contained herein, Respondent's practices and breaches resulted in more than a minima] loss to the B~ within the meaning of 12 U.S.C. § Appendix p. 137 I: . • I 1818(i)(2)(B)(ii)(ll). I. ·156. By reason of the allegations contained here~ Respondent made or caused to be made f31s~ entries in the ~ank's books and ~ords within the meaning of 12 U.S.C. § 1818(i)(2)(B)(ii)(II). '157. By teason of the allegations contained here~ Respondent concealed material facts from bank regulatory authorities within the meaning of 12 U.S,C: § 1818(i)(2)(B)(ii)(ll). ORDER TO PAY '158. . By reason ofRespondent's reckless engagement in unsafe or unsound practices, .' breaches offiduciary duties. andIorviolations of law or regulation, which were part of a pattern. ofmiscondoct that r~ted in pecuniaIy gain or o~er benefit to him and more than a.minimal loss to the Bank, as set forth iIi the NOnCE OF ASSESSMENT, the FDIC has concluded that a civil money penalty should be assessed against Respondent p~t to 12 U.S.C. §§ 1818(i)(2). After taking into accoun~ the appropriateness. of the penalty with respect to the size of Respondent's financial resources and good fiUtb, the gravit¥ of the practices and breaches, the history of previous tmSafe 'or unsound practices or breaches of fiducWy duties, and other matters as justice may require, it is: ORDERED, that by reason of the reckless l.lDSIlfe or unsound practices, breaches of fiduciary duties. and/or violations oflaw or regulation which were part of a pattem ofmisponduct that resulted in pecuniary gain or other benefit to Respondent, a penalty be and hereby is assessed against RJ:spondent pursuant to 12 U.S.C. § 181800(2) in the amount of $200,000, and FURTHER ORDERED, that the effective date of this ORDER TO PAY be, and hereby " Appendix p. 138 .' t. is, stayed Wlti120 days "after the date of receipt of the NOTICE OF ASSESSMENT by ;. Responde~ during which time Respondent may file an 3nswer and request a bearing pursuant to I 12 U.S.C. § 1818(i)(2)(H)'and 12 C.F.R. § 308.19. OPPORTUNITY FOR HEARING 159. Notie: is hereby given that a hearing shall commence at Amarillo, Texas, sixtr (60) days from the date of service of this NOTICE OF INTENT TO REMOVE AND PROlDBIT upon Respondent, or at such pla~' or on such date as the parties to ibis action and the Administrative Law Jugge appointed to hear this matter may agree, for the purpose of taking evidence on the charges herein specified, in order to detemrlne whether a pennanent order should be issued to prohibit Respondent from further participation in the conduct of the affairs of any insured depository institution or organization enumerated in 12 U.S.C. § ISlS(e)(7)(A) without ,.'0 I the prior permission of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in 12 U.S.C. § 1818(e)(7)(D). WITH RESPECT TO THE NOTICE OF ASSESSMENT OF CIVIL MONEY PENALTIES, RESPONDENT MUST SPECIFICALLY REQUEST A HEARING WITBlN 20.DAYS PURSUANT TO 12 U.S.C. § 1818(i)(2)(B).AND 12 C.F.R. § 308.19. IF DESPONDENT FAILS TO FILE A REQUEST FORA BEARlNG WITHIN 20 DAYS OF THE SERVICE OF THE NOTICE OF ASSESSMENT OF crvn. MONEY PENALTY ON HlM, THE PENALTY ASSESSED AGAINST mM PURSUANT TO THE ORDER TO PAY WlLL BE FINAL AND SHALL BE PAID WITHIN 60 DAYS AFI'ER THE NOTICE OF ASSESSMENT OF CIVIL MONEY PENALTY IS SERVED ONBIM. Appendix p. 139 160. The bearing will be public and in all respects conducted in a.ccordanc:e with the provisions of the Act, the AdminisfrativeProcedure Act, 5U.S.C. §§ 551-559, and the FDIC's Rules of Practice and Procecrure, 12 C.F.R. Part 308. The bearing will be held before an AdmiDistrative Law Judge appointed by the Office ofFinanciaI Institution Adjudication pursuant to 5 U.S.C. § 3105. 161. An original and one copy of all papers filed in this proceeding shall be served upon the Office of Financial Institution Adjudication ("OFIA.'" 3501 N. Fairfax Drive, Suite VS- D8116, Arlington, Virginia, 22226-3500 pur~uant ~ 12 C.F.R. § 308.10. Copies ofall papers filed in this proceeding shall be served. upon the Office of the Executive Secretary, Federal . .. Deposit Insurance Corporation, 550 17th Street, N.W. (F-I058), Washington, D.C. 20429; A. T. Dill, m, Assistant General Counsel, FedemJ. DepositJnsurance CoIporation, 550 17th Street, N.W., MB 3020, Washington, D.C. 20429; and upon Stephen C. Zachary, Regional Counsel' (Supervision), Federal Deposit Insurance CoIporation, 6060 Primacy Parkway, Memphis•. Tennessee 38119. Pursuantto 12 C.F.R. § 308.l0(b)(4), all documents required to be filed, excluding documents produced in response to a discovery request pursuant to Part 308.25 and Part 308.26, shall be filed electronically with OFIA. Respondent is hereby directed to file any I answe.r electronically with OFIA at ofia@fdic.gov. Failure to answer within ~e 20-OOy time period shall constitute a waiver of the ri..ght to appear and contest the allegations contained in the NOTICE OF ASSESSMENT and NOTICE OF INTENT TO REMOVE AND PROHIBIT and sha1l~ upon the FDIC's motion, cause the Administrative Law Judge or the FDIC to find the facts in these Notices.to be true as alleged and to issue appropriate ORDERS. 2S Appendix p. 140 '. PRAYER FOR RELIEF WHEREFORE, the FDIC prays for issuance of the ORDER TO PA~ in the form detailed in paragraph 158 above against Respondent; for issuance ofan ORDER OF REMOVAL FROM OFFICE AND PROIDBmON FROM FURTHERPARTICIPATION against Respondent; and • for such other relief as justice may require. Pursuant to delegated authority. Dated at Washington, D.C., this 21 SI day of November. 2014. lsI Christopher J. Newbury Associate Director Division of Risk management Supervision J Appendix p. 141III. Ill.
IX. IX.
C. Campbell Burgess, and for cause of action shows as follows:
I. DISCOVERY CONTROL PLAN
I. 1. Plaintiff intends to conduct discovery under a Level 3 Discovery Control
H. II. PARTIES
III. VENUE AND JURISDICTION
IV. BACKGROUND FACTS
II . 11. Among his many ties to the Bank, Mikkelsen owns 300 shares of Herring
5. Redemption: Redemptjon:
II. PARTIES
III. VENUE AND JURlSmCfION JURISDICTION
IV. FACfS BACKGROUND FACTS
IV. Preferred Stock, consistmg of 2S,OOO Shares. $95 par value.
4. Uquldatlon
E. lote Trul l II SlIDron Honey Attn: Teny Wright Drowning Box 50468
9. 120 .00
X m ~ Tot .. I!A C" ....
C. C. Burgess 10-25-04 Date
9. Respondent is HBI's Vice Chainnan and President
10. RespondentjoinedtbeBankio 1992.
42. The Bank paid the charge in September 2010.
45. The Bank paid the charge.
52. The Bank paid those travel charges.
I I·~ r:" I President
Related
Cite This Page — Counsel Stack
Herring Bancorp, Inc. C.C. Burgess And C. Campbell Burgess v. John Mikkelsen, Acting Solely in His Capacity as Trustee of the John Mikkelsen Trust, Counsel Stack Legal Research, https://law.counselstack.com/opinion/herring-bancorp-inc-cc-burgess-and-c-campbell-burgess-v-john-texcrimapp-2015.