Bank of Commerce v. Goolsby

• Decision Date: 28 May 1917
• Docket Number: 4
• Citation: 196 S.W. 803,129 Ark. 416
• Parties: BANK OF COMMERCE v. GOOLSBY
• Court: Arkansas Supreme Court

196 S.W. 803

BANK OF COMMERCE v. GOOLSBY

129 Ark. 416

No. 4

Supreme Court of Arkansas

May 28, 1917

[Copyrighted Material Omitted] [Copyrighted Material Omitted]

Appeal from Sebastian Chancery Court, Fort Smith District; Wm. A Falconer, Chancellor; affirmed.

Decrees reversed in part and affirmed in part.

Walker & Walker, T. B. Pryor and B. R. Davidson, for all the appellants.

1. The law does not contemplate payment for stock when subscribed--it may be paid for in future installments when called for. The bank had a lien on the stock. Kirby's Digest, §§ 855, 848, 847, 865-6-8. Stockholders had the right to sue other stockholders failing to pay for their stock. 96 Ark. 281. The directors were not asked to bring suit. 97 Ark. 522. The remedy against the stockholders delinquent must first be exhausted. 95 Ark. 124.

2. There is no proof that the directors accepted the return of stock to the bank without authority of the stockholders. No injury is shown by accepting unpaid-for stock from insolvent parties. They had authority under the law to do so.

3. The annual reports were for the public and not for the stockholders, and failure to report only renders the president and secretary liable. Kirby's Digest §§ 848-859; 68 Ark. 433-6; 75 Id. 107.

4. No negligence is shown on the part of the directors while Pyle was in office. 141 U.S. 132.

5. The books were properly audited and only a few small discrepancies were discovered. The expenses were not unusually large, nor the salaries exorbitant. The Halstead business did not wreck the bank. The stockholders had the right to investigate the books--they were present at the meeting. Even false entries do not bind a director as to a stockholder, unless fraudulently made to deceive him. 62 Ark. 33-43. Directors are not liable for the frauds of managers without active participation, or wilful or negligent violation of duty, Woods Field on Corp., §§ 158, 152. When a director acts as manager, etc., he is entitled to compensation. 86 Ark. 608. Directors are stockholders and not liable for mistakes in judgment, if honest. 71 Penn. St. 11.

6. Plaintiffs do not rely upon any action taken by the board of directors, as such, but upon individual statements made by individual directors in no way connected with board meetings. 23 A. 426. A director can only act in connection with the board. Clark on Corp., p. 489, § 193. Each director is answerable for his own act. Beach Priv. Corp. 420, § 254. No neglect is shown. Clark on Corp., § 203.

7. This case is based largely, if not altogether, on individual statements of directors which it is claimed were incorrect, misleading or untrue. Statements of this character are not actionable as against a board of directors. If false and fraudulent they only warrant a recovery by action of deceit against the individual and the statements must be proven false, etc. 71 Ark. 305-9; 38 S.W. 144; 106 Wis. 574; 82 N.W. 546. See also 36 F. 617; 65 Id. 932; 75 Id. 781-5; 78 Id. 558; 80 Id. 590; 68 Ark. 459; 141 U.S. 132, etc.

8. A suit of this character does not lie. 54 F. 985; 108 F. 909; 93 Ark. 112. Failure to file the annual certificates creates a liability at law, and does not give equity jurisdiction. 99 Ark. 51-56. See also 96 Ark. 268-274. Many other points are made and authorities cited, but the briefs are too long and numerous to cite further. The record is full of individual statements to individuals, on which the findings were based; all of which were objected to and there was no testimony to warrant a decree of the character rendered here. The sales of stock were not made in violation of law. 71 Ark. 379; 120 U.S. 287, etc.

Daniel Hon, for appellee, Lora Goolsby.

1. The stock, property, affairs, business and management of a corporation are placed in the hands and under the care of the directors. Kirby's Digest, § 841. They are jointly and severally liable for filing a false certificate showing that the capital stock was fully paid in, when it was not. 92 Ark. 416; U.S. Advance Opinions, May 1, 1916, Law. Co-Op. Pub. Co., 429; Jones Nat. Bk. v. Yates, 95 Ark. 124, etc.

Our law requires the capital stock to be paid in cash. Act 113, Acts 1913, §§ 18, 24.

The directors are presumed to know the condition of the bank. 3 A. & E. Enc. Law, 843. They are liable if they transcend or abuse their powers. Ib. 845. They are liable * * * to stockholders for loss occasioned by their failure of duty. 21 Id. 784, 875, 894-6; 54 Am. St. 719, 725; 71 Id. 615. They are bound to know all that is done by the bank; its rules, systems and course of general procedure, etc., and must use ordinary care and diligence to know the conduct of its subordinate officers, as well as what the bank books show, etc. Cases supra; 168 N.Y. 157; 85 Am. St. 667; 1 Chy. (L. R.) 161-9. Without considering the falsifying of the records and the false reports made, sworn to and filed, the inattention and negligence of the directors, through which the bank failed and the stock became worthless, made the directors liable to the stockholders. 74 Ark. 585; 95 Id. 124; 92 Id. 327; 110 Id. 39; 97 Id. 522.

2. On the cross-appeal cites 1 Lansing (N.Y.) 381; cases supra.

3. The decree of the chancellor on the main appeal is right. 44 Ark. 25, etc., etc.

Winchester & Martin, for Z. L. and Mary B. Reagan and L. V. Parker.

We simply supplement the brief of Judge Hon by saying that the findings of the chancellor are fully sustained by the evidence. The bad faith and false representations on the part of the directors resulted in the failure of the bank and clearly made them liable. Authorities cited, supra.

H. C. Mechem, for E. H. Bruce and J. M. Hughey.

1. Bruce purchased his stock in reliance upon the first annual report of the corporation, showing a profit when there had been actually a loss of more than $ 2,000.00. Morton either falsified the books or had it done for the express purpose of deceiving the public. Morton is certainly liable to Bruce. 92 Ky. 176.

Mayes is also liable, as it was his duty to know what the books disclosed as to its business, before he made the report. In addition to the cases cited by Judge Hon, see 61 N.E. 567; 24 S.E. 478; 1 Cook on Corp. (6 ed.) § 3252.

2. Both Bruce and Hughey are entitled to judgment against Morton, Fulbright, Mayes and Peel, for selling stock to insolvent persons on credit and reporting it as paid up. Const. Art. 12, § 8; 71 Ark. 379; 8 A.D. 427; 134 Fed. (C. C. A.) 343; 102 Tex. 207; 170 S.W. 642; 72 Cal. 55; 103 Id. 624; 142 S.W. 96; 188 Id. 513. Notes are not money, nor payment within the meaning of the law. See also 90 P. 169; 117 Wis. 382; 2 So. 727, etc. The case 141 U.S. 132 has not been followed in this State. Ark. cases, supra; 110 Ark. 139; 95 Id. 124, etc. The continued absence of Fulbright rendered him liable. 232 F. 758.

The complaint of Bruce and Hughey particularly urge the German-Halstead business and contend that it grew out of a failure of the directors to know the character of business carried on--a partnership in a pawn shop making usurious loans. The decree should be affirmed as to Bruce and Hughey.

Holland & Holland, for John H. Holland, M. S. Buckley, J. F. Wright and Herbert Wright.

1. Adopt the brief of Judge Hon and cite as to liability of the directors for at least lack of care, attention and supervision that the law enjoins. 92 Ark. 327; 95 Id. 124; 110 Id. 39. The payments by Lora Goolsby et al. were voluntary and made after full knowledge and no recovery could be had on their cross-appeal.

G. C. & Joe Hardin, for Mrs. E. D. Vann.

Adopt the briefs for appellee, supra.

A. A. McDonald, for I. N. Johnson.

Adopts the arguments and briefs filed for appellees, and cites 99 Ark. 438; 101 Id. 95; 64 Id. 627; 6 Am. Dec. 207; 1 Am. & E. Enc. Law (2 ed.) 1058; 44 S.W. 454-8.

STATEMENT BY THE COURT.

On the 21st of November, 1910, a bank was duly incorporated under the name of "Day and Night Bank," and its place of business was Fort Smith, Arkansas. It had an authorized capital stock of $ 50,000. The name of the bank was afterwards changed to that of "Bank of Commerce," hereafter called the bank.

In November, 1914, the bank, under the direction of the State Bank Commissioner, went into liquidation and transferred all of its assets to the City National Bank of Fort Smith.

Separate suits were instituted by Lora Goolsby, John Holland and M. S. Buckley, who were stockholders in the bank, against the directors and certain other stockholders. For cause of action the plaintiffs alleged that stock had been subscribed by various persons amounting in the aggregate to $ 14,475.00 that had not been paid; that the directors had negligently failed to collect the delinquent stock subscriptions, but, on the contrary, had accepted return of the stock from a number of the subscribers; that notwithstanding the uncollected stock, the bank and the directors, through the officers of the bank, filed an annual certificate reporting that the full amount of capital stock paid in was $ 50,000; that the directors employed one C. L. Pyle as cashier and issued to him 120 shares of stock without his paying therefor and accepted his note for the same, which they never collected, although he was on a salary until the early part of 1914; that the directors negligently and purposely failed to give attention to and take control of the bank during the incumbency of Pyle, the cashier, and allowed him to recklessly dispose of the assets of the bank in making worthless loans, thereby reducing the bank's assets to such an extent that the Bank Commissioner, in 1914, required an assessment of 50 per cent. against the stockholders.

All the complaints contained substantially the same allegations, Mrs Goolsby alleging, as an additional cause of...