Deal v. Johnson

Decision Date18 August 1978
Citation362 So.2d 214
PartiesWiley R. DEAL, Trustee in Bankruptcy of Covington Grain Co., a corporation, a Bankrupt v. Rodney R. JOHNSON et al. 77-213.
CourtAlabama Supreme Court

G. M. Harrison of Merrill & Harrison, Dothan, for Edward S. Allen of Balch, Bingham, Baker, Hawthorne, Williams & Ward, Birmingham, and for Abner R. Powell, Jr., of Powell & Sikes, Andalusia, for appellant.

Oakley Melton, Jr., of Melton & Espy, Montgomery, for appellee, Rodney R. Johnson.

Maury D. Smith and Charles M. Crook, Montgomery, for McDonald appellees.


Plaintiff, Wiley R. Deal (Trustee), trustee in bankruptcy of Covington Grain Company, appeals from the denial of his motion for a new trial and from a verdict and judgment of $15,000 in his favor against defendant Morris E. Rabren, president and director of the bankrupt corporation, from a verdict and judgment in favor of defendants J. E. McDonald and Rodney R. Johnson, directors of the corporation, and from a directed verdict in favor of the other three defendants, stockholders and alleged directors of the corporation.

This appeal is taken only as to Count III of Trustee's complaint which sought damages from the defendants as officers or directors of the Covington Grain Company for their misfeasance or malfeasance in the performance of their corporate duties. It is alleged that the directors relinquished their duties and turned over control of the business to the president, Morris Rabren, and that this amounted to gross negligence. As a result of this gross negligence, it is claimed, the company lost $640,592 through speculative commodity contracts entered into by Rabren.

The Trustee's position, as stated in his reply brief, is as follows:

". . . (T)he Appellees earnestly insist that under said Section (§ 10-2-58 (Code 1975)) the Appellees had the right to rely on the report made to the Corporation by its President, Morris Rabren, to the effect that the commodity contracts that the Corporation had with Merrill Lynch were for 'the protection of the business' and the other report that he gave to the Appellees 'that the Corporation was having the best year it ever had'.

"We would respectfully call to the Court's attention another provision of the Alabama Business Corporation Act which was part and parcel of the original Act passed in 1959, being Section 10-2-5 of the Code of Alabama of 1975 and being Title 10, Section 21(97) of the Code of Alabama of 1940 as amended. This Section is as follows:

" 'Neither an unqualified statement of rights or powers nor an unqualified grant of authority in this chapter shall be taken, or construed, to abrogate, repeal, displace, modify or impair the fiduciary obligations of directors or other officers or employees of any corporation or of stockholders having or exercising control thereof, or of any function thereof, whether by reason of ownership of a majority or other controlling interest therein or otherwise, or the jurisdiction of the courts to grant relief by way of injunction or otherwise, in order to forestall, prevent, correct, remedy or allow damages for fraud, oppression, imposition or other inequitable or remedial conduct in conformity with the applicable principles and practices of law.'

"Thus it will be seen from the direct language of the last quoted provision of the Alabama Business Corporation Act that the same does not give the Directors the right to blandly rely upon a report by the President of a Corporation, but such Directors must exercise fiduciary duties as a Director notwithstanding such reports. . . ."

". . . (T)he Appellees, McDonald and Johnson, as prudent businessmen, did not exercise that degree of diligence characterized as ordinary, which an ordinary prudent man would exercise about his own affairs. But to the contrary, they did absolutely nothing to keep themselves informed about the business affairs of the Corporation and what was being done with the corporate assets and property confided to their care and the undisputed evidence shows that through speculation on the part of Morris Rabren, the President of the Corporation and the person to whom the Appellees had committed the management of the affairs of the Corporation . . . a total of $685,000.00 was lost. . . . As a matter of law, the Appellees, McDonald and Johnson, were guilty of 'gross negligence' and under the undisputed evidence they are answerable for the losses of the corporation occasioned as a result of such gross negligence."

In answer thereto, the defendants McDonald and David Jefferies state in brief as follows (omitting transcript references):

". . . The crux of the Trustee's theory of recovery in this case is that Morris Rabren, as President of the company, caused it to engage in speculation in the commodities futures market, and that the defendants (McDonald and Johnson), as members of the Board of Directors, Should have known that he was doing this and put a stop to it. . . ."

"The Trustee contends that at some point during the latter part of the year 1974, Morris Rabren started purchasing commodities futures contract(s) on behalf of Covington Grain At a time when he did not have offsetting sales which needed to be hedged. Thus, he contends that Morris Rabren started purchasing Speculative commodities contracts rather than legitimate hedges, and that because the price of soybeans thereafter went down, Covington suffered large losses which precipitated its bankruptcy. . . .

"In approximately August of 1974, a meeting of the stockholders and directors of the company was held at the offices of the company's accountants. At this meeting, the company's financial statement for the year ending April 30, 1974, was presented and explained by the company's certified public accountant. Some question was raised about certain commodities contracts reflected in the statement. At that time Morris Rabren explained that the purpose of these transactions was merely to protect the company's position, and that they were not speculative contracts. The company accountant and all of the defendants cautioned Morris that he should be careful not to engage in any speculation, and Rabren was in complete agreement with this view. The company's certified public accountant, who had served in that capacity since the company's inception, testified that he had no reason whatsoever to doubt Mr. Rabren's truthfulness, and that Rabren had been a responsible businessman in the community for many years. Further, based upon his examination of the company's affairs, the accountant saw no reason whatsoever to recommend a special audit regarding commodities transactions. The financial statements which were presented at this meeting showed that the company had a profit of $63,000.00, . . . . (Four months later, . . . the company (was) in bankruptcy). These facts are not disputed by the Trustee. . . . The Trustee's contention is that the directors should have thereafter gone into the offices of the company And conducted their own independent examination to determine whether Rabren was lying to them as to the nature of the company's commodities transactions. The validity of this contention is totally destroyed by the Trustee's own knowledgeable witnesses, i. e., Mr. Winkler and Mr. Katz, brokers with Merrill, Lynch, Pierce, Fenner and Smith. . . ."

"Mr. Katz testified that if, after opening a hedging account, Rabren thereafter decided to engage in transactions which were not legitimate hedges but were in fact speculation, this would have been extremely difficult to detect, and would have required total knowledge about everything connected with the business. To detect this, it would have been necessary to know the total amount of beans which Covington had received from farmers, how many were priced and how many were unpriced, how many were held in storage and how many were shipped or sold to others, how many were sold priced and how many were sold unpriced, and other factors. Mr. Katz testified that he had been in the brokerage business for a number of years and is generally familiar with corporate practices relating to commodity transactions, and he does not know of any particular ledger or book that anyone could refer to to determine whether speculation was in fact occurring, and such record keeping is a very complex affair. Even with his experience and knowledge of the field, Mr. Katz does not feel that he himself would be qualified to determine under these circumstances whether a particular transaction was a...

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