Bank of Little Rock v. McCarthy

• Decision Date: 20 February 1892
• Citation: 18 S.W. 759,55 Ark. 473
• Parties: BANK OF LITTLE ROCK v. MCCARTHY
• Court: Arkansas Supreme Court

18 S.W. 759

55 Ark. 473

BANK OF LITTLE ROCK v. MCCARTHY

Supreme Court of Arkansas

February 20, 1892

APPEAL from Hot Spring Circuit Court in chancery. JAMES B. WOOD Judge.

Judgment reversed and cause remanded.

W. S McCain and U. M. & G. B. Rose for appellant.

The mortgage to McCarthy & Joyce was not authorized 'by a proper meeting of the board of directors. One of the directors was not notified. All must have notice, or the proceedings are void. 52 Ark. 511; 14 S.W. 1101. It is true a director cannot put a stop to the corporate business by simply leaving the jurisdiction. If after reasonable search he cannot be found, the remaining directors may attend to the necessary affairs. No case of emergency is shown in the case and neither personal service was had nor was the statute followed even by posting notices on the door of Fields' residence. See 53 Ark. 242; 2 Black, 719.

Sanders & Watkins and W. L. Terry for appellees.

It is true that in 52 Ark. 511, and 54 Ark. 58, the court decided that notice of a special meeting should be served on all the directors of the corporation. While we do not challenge the correctness of the rule, yet the service of notice and the presence of all the directors is not an absolute and indispensable pre-requisite to the exercise of corporate power by a quorum of the board; and under certain circumstances a court of equity may and will excuse the service of notice and hold good the bona fide action of the quorum when otherwise legally assembled. Mansf. Dig., sec. 969; 2 Kent, Com., p. 293; 4 Am. & Eng. Corp. Cases, 234. The power to act was vested in a quorum of the board, and the necessity of giving notice to all the members is a matter which may or may not be excused, according to circumstances. 23 N.H. 569; 55 Conn. 455; 41 Ohio St. 558. Field was served with notice. A notice was left at his residence or usual place of abode. This was sufficient, there being no mode pointed out by statute or by-laws. 16 Me. 186; 20 Me. 37; 1 Waterman, Law of Corp., 206; Field on Corp., 246; Dillon on Mun. Corp., sec. 263; 55 Conn. 455. In certain exigencies notice may be dispensed with. See 55 Conn. 455; 8 Ry. & Corp. L. J., 91; Beach on Corp., sec. 282. The execution of a mortgage to secure indebtedness is "ordinary business" of a corporation. 8 Conn. 200; 8 Ry. & Corp. L. J., 91. The notice on Field was served in accordance with Mansf. Dig., sec. 5206.

OPINION

HEMINGWAY, J.

The Bratt Lumber Company was a corporation organized under the laws of this State, to conduct a milling and lumber business. Its stockholders were J. A. Bratt, J. H. Trump, W. H. Crawford, Leonard Bratt and C. B. Field; the board of directors was composed of the same persons, with J. A. Bratt as president and Field as secretary and treasurer. About the 1st day of August, 1889, the company owed McCarthy & Joyce about $ 25,000, and the Bank of Little Rock the same sum. It was in debt to its employees and other persons in amounts aggregating about $ 6500. The Bratts and Trump live at Malvern, the principal place of business of the company; Crawford lived in Indiana and Field resided in the city of Little Rock, where he had an established residence and a place of business. At that time Field left the State to be absent for awhile, stating to Bratt, the president, that he would return in a few days and provide means to pay the pressing debts of the company. Field not returning in time to provide for such demands, Bratt inquired of the person in charge of his office in Little Rock to learn where he was, and was informed that he was stopping at the Tremont House in the city of Chicago. Bratt then went to Kansas City, where the company made sales of lumber, for the purpose of collecting the proceeds of such sales, to meet the company's liabilities; finding that the sales were confused with sales made by other companies of which Field was an officer, and that he could collect nothing on that account, he proceeded to Chicago for the purpose of seeing Field. On his arrival he found that Field had left Chicago, and, being unable to learn his whereabouts, Bratt returned to Little Rock without having obtained the desired funds. He then applied to McCarthy & Joyce to lend him the amount needed; they declined to do so unless he would secure their old debt, as well as the sum to be loaned, by a mortgage on the company's property; but offered to lend him $ 10,000 upon condition that such security be given. Bratt agreed to give the mortgage as requested, if arrangements for its execution could be made. After a conference with McCarthy & Joyce and their attorney, it was agreed that Bratt should call a meeting of the board of directors for the purpose of considering whether the company should mortgage its property to them for the purpose of securing their past indebtedness and a loan to be made of $ 10,000. Notices of the meeting were prepared and served on all the directors except Field. Bratt again inquired at Field's office to learn where he was, and was told that, if he was not in Chicago, the person in charge of the office did not know where he was. Accordingly, on the 29th of August, 1889, Bratt went with a notice of the meeting to Field's residence and, finding no one there, inserted it between the door and the casing, and thus left it. Field's family were then absent from the city, and the residence was unoccupied except by a man who slept there; the notice left at his house was not received by him. On the 31st of August, a meeting of the directors was held in pursuance of the notice, all the members being present except Field; and an order was made by a vote of three to one in favor of making the mortgage to McCarthy & Joyce. In pursuance thereof a mortgage was shortly executed, covering about all of the company's assets, for the purpose of securing the existing debt to McCarthy & Joyce and also the sum of $ 10,000 to be advanced by them. On the same day, Trump, the dissentient director, filed the complaint in this case, alleging the indebtedness to McCarthy & Joyce and to the bank, as well as the execution of the mortgage; and that the affairs of the company were being extravagantly and wastefully conducted, and asking that the court appoint a receiver to take charge of its assets and conduct its business. The company, the bank and McCarthy & Joyce were made defendants, and upon an application in vacation the chancellor granted the application for a receiver. McCarthy & Joyce filed an answer and cross-bill, the material feature of which was a prayer for the foreclosure of their mortgage. The bank also filed an answer and cross-bill, the material features of which were, allegations that the mortgage to McCarthy & Joyce was void (for the reason, among others, that the meeting at which it was authorized was not a lawful meeting of the board, Field having no notice thereof and not being present), and a prayer that the assets of the company be ratably distributed among its creditors. The assets were by consent of all parties converted into money, which was to be held in lieu thereof, subject to the determination of this cause. The cause came on to be finally heard upon the pleadings and proofs, and the court dismissed the cross-bill of the bank and entered a decree in accordance with the prayer of McCarthy & Joyce. The bank appealed.

The assets realized, when sold, $ 25,000 in round numbers, and, as the debts more than doubled that sum, it is evident that the company was insolvent. There was nothing in the articles or by-laws of the company fixing the time for regular meetings of the board of directors, and no provision for calling special meetings. McCarthy & Joyce advanced nothing upon the $ 10,000 loan provided for in the mortgage, and claim under the mortgage a security for the past debt only. It does not appear that the board of directors ever attempted to hold a meeting after the day when the mortgage was executed.

The two questions which we have deemed it necessary to consider are, first, was it necessary to the validity of the directors' meeting that Field should have notice thereof? and if so, second, was he notified?

Counsel have argued other questions with ability and learning, which merit praise and commendation. But however interesting we might find that field to which we are invited, the demands that a crowded docket asserts upon our time forbid that we follow them further than is necessary to dispose of this case. We dismiss therefore the other matters argued, and proceed to the consideration of the questions stated.

The statute provides that the stock, property, affairs and business of business corporations shall be managed by not less than three directors (Mansf. Dig., sec. 964); and, further, that a majority of the directors, convened according to the by-laws, shall constitute a quorum for the transaction of business. (Sec. 969).

In the case of Simon v. Sevier Association, 54 Ark. 58, 14 S.W. 1101, the validity of a general assignment authorized by a majority of the directors at a meeting of which the absent directors had no notice was considered, and we held that the statute authorized a majority to act only at a meeting legally convened, and that it was essential to a legal meeting that it be called in accordance with the by-laws or rules of the corporation or upon due and legal notice given to each of the members. There was no contention that notice could not have been served on each member, and no expression of the law where that was a fact.

Subsequent investigation has not altered our views as then expressed but we are convinced that they are in a line with the authority of text writers and adjudged cases. If the rule were otherwise, the rights and interests of minority holders would be liable to great abuse. ...