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State National Bank of El Paso v. Farah Manufacturing Co.

678 S.W.2d 661 (1984)

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State National Bank of El Paso v. Farah Manufacturing Co.

Texas Court of Appeals

678 S.W.2d 661 (1984)

Facts

The Farah Manufacturing Company, Inc. (company) (plaintiff) signed a refinancing agreement with State National Bank of El Paso and other lenders (defendants). The lenders attributed the company’s financial straits to the actions of its ex-president, William Farah. Therefore, the refinancing agreement contained a clause (the anti-Farah clause) empowering the lenders to block Farah’s return to management. When it became clear that many of the company’s directors wanted to reinstate Farah, the lenders could not agree on whether to invoke the anti-Farah clause. Despite that uncertainty, one of the lender’s lawyers decided to bluff the directors into withdrawing their support for Farah. The lawyer assured the directors that if Farah regained control, the lenders would immediately invoke the anti-Farah clause, withdraw their financial support, and drive the company into bankruptcy. The bluff worked. It was some time before Farah retook the company’s presidency, but when he did, he quickly restored the company’s profitability. The company sued the lenders for fraud. The trial court awarded the company hefty damages for the profits it could have earned had the lawyer’s bluff not delayed Farah’s return to power. The lenders appealed to the Texas Court of Appeals.

Rule of Law

Issue

Holding and Reasoning (Schulte, J.)

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