Bailey v. O'Neal

• Citation: 122 S.W. 503,92 Ark. 327
• Parties: BAILEY v. O'NEAL
• Decision Date: 08 November 1909
• Court: Supreme Court of Arkansas

122 S.W. 503

92 Ark. 327

BAILEY v. O'NEAL

Supreme Court of Arkansas

November 8, 1909

Appeal from Independence Circuit Court; Frederick D. Fulkerson Judge; affirmed.

Affirmed.

Stuckey & Stuckey, Gustave Jones, S.D. Campbell and Morris M. Cohn for appellants.

Trustees are not held responsible for the devastavit which co-trustees may perpetrate. 141 U.S. 151; 30 F. 307; Story's Eq. Jur § 1280; Perry on Trusts, § 417. Directors of corporations may delegate duties to cashiers as well as to presidents. 77 Ark. 172; 62 Ark. 33; 66 Ark. 327; 141 U.S. 132; 155 Mo. 1; 87 Ky. 574; 147 Pa.St. 140; 12 Serg. & R. 256; 8 Wheat. 338; 91 F. 587; 33 C. C. A. 222; 183 Mo. 552; 82 S.W. 76. Directors are not trustees. 59 Ark. 562; 71 Ark. 438. The court will take judicial notice of the usages and customs of banking. 4 Ark. 302; 12 Ark. 645; 45 Ark. 347; 77 Ark. 172; 6 Ark. 292; 67 Ark. 243. There is no privity between a director and a depositor of a bank. 155 Mo. 232; 96 N.W. 1033; 67 Mo. 256; 183 Mo. 552; 82 S.W. 76; 105 N.W. 924; 15 S.W. 448; 89 Tenn. 633; 73 O. St. 275.

A creditor cannot maintain an action against the directors for nonfeasance of duty. 9 W.Va. 580; 155 Mo. 271; 67 Mo. 264; 183 Mo. 570. The neglect of the director must be an intentional neglect or refusal. 37 Mich. 217; 102 Mich. 547; 61 N.W. 9; 155 Mo. 232; 206 U.S. 158. A cashier, when intrusted with the duty of making loans, is not responsible for an error of judgment when he has exercised reasonable skill, diligence and prudence. 48 N.Y. 305. Directors are not liable for mistake of judgment. 71 Pa.St. 11; 147 Id. 140; 82 Wis. 460; 52 N.W. 600. A director is not presumed to know the contents of the books of the bank of which he is director. 141 U.S. 162; 15 S.W. 335; 89 Tenn. 630; 126 N.Y. 113. A bank is not insolvent under the law unless it is unable to meet its liabilities as they accrue. 29 N.W. 166; 54 S.W. 226; 152 Mo. 522; 92 N.W. 420; 75 Ark. 153.

OPINION

HART, J.

W. R. O'Neal and S. Heineman brought separate suits in the Jackson Circuit Court against A. D. Bailey, George W. Decker, Thomas J. Graham, J. M. Jones, Joseph M. Stayton, E. P. Shoffner and T. S. Stephen. The complaint in each case, in substance, alleges that the Bank of Newport was a corporation, organized under the laws of the State of Arkansas, and was engaged in carrying on a general banking business at Newport, Arkansas. That the plaintiff was a depositor in said bank, and that the defendants were directors thereof. That said bank became insolvent, and on the 20th day of April, 1906, a receiver was appointed by the chancellor of the Jackson Chancery Court to take charge of its affairs. That the defendants as directors of said bank intentionally neglected and refused to perform the duties required of them by statute, and that thereby the bank became insolvent. Wherefore plaintiff asks judgment for the amount due him as a depositor of said bank. The defendants answered, denying any liability under the statutes.

The cases were consolidated for purpose of trial, for the reason that they were cause of a like nature and relative to the same question. (See Acts of 1905, p. 798.) On petition of the defendants a change of venue was granted to the Independence Circuit Court. The cause was heard before a jury, and at the conclusion of the testimony, after hearing the argument of counsel on the instructions, the court directed the jury to return a verdict in favor of the plaintiffs, which was accordingly done. From the judgment rendered upon the verdict the defendants have appealed to this court.

It is first insisted by counsel for the defendants that the plaintiffs, as creditors of the bank, could not maintain the action, but that it should have been brought by the receivers. In considering this question it may be well to set out all our statutes that may have any bearing on the subject. They are the sections of Kirby's Digest, which read as follows:

"Sec. 841. The stock, property, affairs and business of every such corporation shall be under the care of, and shall be managed by, not less than three directors, who shall be chosen annually by the stockholders at such time and place as shall be provided by the by-laws of said corporation, and shall hold their offices for one year, and until others shall be chosen in their stead."

"Sec. 848. The president and secretary of every corporation shall annually make a certificate showing the condition of the affairs of the corporation," etc.

"Sec. 859. If the president or secretary of any such corporation shall neglect or refuse to comply with the provisions of section 848 and to perform the duties required of them respectively, the persons so neglecting or refusing shall jointly and severally be liable to an action founded on this statute for all debts of such corporation contracted during the period of any such neglect or refusal."

"Sec. 862. If the directors of any such corporation shall declare and pay a dividend when the corporation is insolvent, or any dividend the payment of which would render it so, the directors assenting thereunto shall be jointly and severally liable in an action founded on this statute for all debts due from any such corporation at the time of such dividend."

"Sec. 863. If the president, directors or secretary of any such corporation shall intentionally neglect or refuse to comply with the provisions of this act, and to perform the duties therein required of them respectively, such of them as so neglect and refuse shall be jointly and severally liable, in an action founded on this statute, for all the debts of such corporation contracted during the period of any such neglect or refusal."

"Sec. 864. If any corporation, organized and established under the authority of this act, shall violate any of its provisions, and shall thereby become insolvent, the directors ordering or assenting to such violation shall be jointly and severally liable, in an action founded on this statute, for all debts contracted after such violation as aforesaid."

In construing sec. 859, this court has recognized the right of the creditor to bring the suit against the officers of the corporation. Nebraska National Bank v. Walsh, 68 Ark. 433; Beekman Lbr. Co. v Ahern, 75 Ark. 107, 86 S.W. 842; Myar v. Poe, 79 Ark. 465, 95 S.W. 1005; Jones v. Harris, 90 Ark. 51, 117 S.W. 1077.

It is true that in Fletcher v. Eagle, 74 Ark. 585, 86 S.W. 810, a case precisely similar to the one at bar, the suit was brought by the creditors in the name of the receiver of the bank, but no objection was made on that account, and the case turned on other issues.

In the case of Beekman Lumber Co. v. Ahern, supra, the court held that when an officer fails to file the annual certificate as required by section 848, and upon discovering his oversight files it, he is not liable for debts thereafter contracted by the corporation until he makes another default in filing another statement. The reason given for such holding is "that it was the intention of the law to make it to the interest of the officer to file his statement at as early a day as possible, when he discovers the oversight."

The object of each of the statutes is to make the officers named therein liable for the debts of the corporation during the period of their neglect. Liable to whom? Manifestly to the creditors of the corporation; for any other rule would ignore the real policy of the statute, which is for the protection of the creditor. The act expressly provides that the director shall be liable in any action founded on the statute for certain debts of the corporation, and it plainly means that he is liable to the person to whom the debt is due. In each of the sections of the statute above quoted, the liability is directly to the creditor, and not to the corporation. In the case of Patterson v. Stewart, 41 Minn. 84, the Supreme Court, in a well considered opinion delivered by Mr. Justice Mitchell, in construing a similar statute of the State of Minnesota, expressly held that a right of action is given to the creditor directly against the directors, and that the fact that the affairs of the corporation have been placed in the hands of a receiver neither takes away nor suspends this right of action. See, also, 3 Thompson on Corporations, § 4265. In such cases the decision reached must come from the terms of the statutes themselves. Hence there can be no profit in reviewing decisions based upon the common law, or upon statutes unlike those now under consideration.

The most serious question in this case arises upon the merits; and is, did the court err in directing a verdict for the plaintiffs?

In considering this question we must determine whether malfeasance or nonfeasance on the part of the directors is the test of their liability. This action is founded upon sections 863 and 864 of our statutes quoted above. The statute creates the duty to be performed by the directors, and the liability that attaches for a failure to perform that duty. It changes the rule of the common law, and is therefore the exclusive test of liability. Hence it will not be pertinent or useful to consider whether the defendants are liable at common law, and a review of the cases based upon the common law or upon statutes essentially different from our statutes will be passed by.

Our statutes in question have been construed by this court in the case of Fletcher v. Eagle, 74 Ark. 585, 86 S.W. 810. Chief Justice HILL, who delivered the opinion of the court, in discussing the instructions given in the case, said:

"The circumstances mentioned in the sixth instruction, and they are sustained by the evidence, fully authorized the directors to have implicit confidence in England, and justified their selection of him as...