## Facts

- Farah Manufacturing Company, Inc. (FMC), a publicly held apparel manufacturer, suffered major losses following labor disputes and a boycott from 1972–1976.
- FMC’s board replaced longtime CEO William F. Farah in 1976; FMC later refinanced with a bank group in a $22 million amended and restated loan agreement (Feb. 14, 1977).
- The agreement included a “management change” default clause allowing an event of default upon a change in CEO or other executive management that any two banks considered adverse “for any reason whatsoever.”
- At a March 7, 1977 directors’ meeting, Farah sought reinstatement as CEO; evidence indicated many directors were inclined to support his return.
- The lenders were not uniform on whether they would invoke the management-change clause if Farah returned.
- A lender-side representative communicated to FMC’s board that reinstating Farah would trigger immediate default, termination of financing, and likely bankruptcy; the jury found these statements falsely portrayed the lenders’ agreed position and intent.
- FMC alleged the misrepresented threat delayed Farah’s reinstatement for years; when he later returned as president, FMC’s profitability improved.
- FMC sued State National Bank of El Paso (State National) and others for fraud, duress, and tortious interference, seeking lost profits allegedly caused by the delayed management change.
- A jury found State National, acting alone or with others, committed fraud, duress, and interference proximately causing damages, and awarded $18,947,348.77.

## Issues

1. Whether legally and factually sufficient evidence supported findings that State National, alone or in concert with other lenders, committed fraud by misrepresenting the lenders’ position and intent regarding enforcement of the management-change default clause.
2. Whether the lenders’ threatened use of the default clause, coupled with the circumstances of FMC’s financial vulnerability, supported liability for duress and tortious interference with FMC’s corporate governance decisions.
3. Whether FMC’s claimed lost-profit damages were recoverable and proved with reasonable certainty, including causation and proper submission to the jury.
4. Whether the existence of a contractual right to declare default insulated a lender from tort liability when the right was used through misrepresentation or coercive tactics.

## Decision

- The court of appeals held the evidence sufficient to support the jury’s liability findings against State National for fraud, duress, and tortious interference, including findings that FMC relied on misrepresentations about the lenders’ unified intent to declare default.
- The court rejected the argument that a contractual default clause barred tort liability where the clause was threatened or invoked through knowingly false statements and coercive conduct.
- The court upheld lost-profit damages as supported by evidence and not purely speculative under the governing “reasonable certainty” standard, while modifying aspects of the judgment.
- The judgment was reformed and affirmed as reformed.

## Legal Principles

- A party may commit actionable fraud by knowingly misrepresenting an existing fact about its present position or agreement (including a collective lender stance) when made to induce reliance and when reliance causes injury.
- Contractual enforcement rights do not provide immunity from tort liability when exercised or threatened through fraudulent misrepresentation or coercive conduct amounting to duress or improper interference.
- Economic duress may be established where wrongful or deceptive threats exploit a party’s financial vulnerability and effectively leave no reasonable alternative but compliance.
- Tortious interference can arise when a lender uses deceptive threats tied to financing leverage to improperly affect a borrower’s internal business decisions.
- Lost profits are recoverable when causation is shown and the amount is proved with reasonable certainty; an established operating history and financial evidence may support a jury’s calculation.

## Conclusion

The court held that a lender’s threatened use of a management-change default clause can support fraud, duress, and tortious-interference liability when the threat is based on misrepresentations about the lenders’ agreed intent, and it largely sustained a substantial lost-profits award as adequately supported by the evidence while reforming the judgment.


State Nat’l Bank of El Paso v. Farah Mfg. Co., 678 S.W.2d 661 (Tex. App.—El Paso 1984)