First Commercial Bank, N.A. v. McGaughey Bros., Inc.

• Decision Date: 28 February 1990
• Docket Number: No. CA,CA
• Citation: 785 S.W.2d 236,30 Ark.App. 174
• Parties: FIRST COMMERCIAL BANK, N.A., Appellant, v. McGAUGHEY BROTHERS, INC. and J.C. McGaughey, Appellees. 88-273.
• Court: Arkansas Court of Appeals

Page 236

785 S.W.2d 236

30 Ark.App. 174

FIRST COMMERCIAL BANK, N.A., Appellant, v.McGAUGHEY BROTHERS, INC. and J.C. McGaughey, Appellees.

No. CA 88-273.

Court of Appeals of Arkansas En Banc.

Feb. 28, 1990.

Michael G. Thompson, Guy Wade, Little Rock, for appellant.

James A. McLarty, Newport, for appellees.

JENNINGS, Judge.

Appellant, First Commercial Bank, brought suit against McGaughey Brothers, Inc., and, in the alternative, J.C. McGaughey, individually, on an instrument of guaranty, seeking judgment for $160,000.00.The guaranty agreement was signed by J.C. McGaughey as vice president for the corporation.A jury found no liability on behalf of either the corporation or Mr. McGaughey individually.We conclude that the case must be reversed and remanded.

This litigation stems from the financial problems experienced by the Village Creek and White River Levee District and the Mayberry Drainage District, two eastern Arkansas improvement districts.By 1983 the two districts owed approximately $1,300,000.00 to the Merchants and Planters Bank of Newport.For some time both districts had had trouble making payments of either principal or interest, and for several years the notes were annually renewed with the interest due being added to the amount of the new note.

The districts were merged in 1983 with a view towards annexing additional land in order to have a bond issue to pay for repairs to improvement district property.A subsequent annexation attempt failed.¹Also by 1983, the Federal Deposit Insurance Corporation had required that the directors of Merchants and Planters Bank agree to demand that the loan be paid by the end of that year or else suffer a charge-off.The improvement district was advised that the loan had to be refinanced.Eventually the improvement district through its attorney, Fred Pickens, contacted First Commercial Bank about a loan.At the time, Mr. Pickens was also a member of the board of directors of Merchants and Planters Bank, as well as a member of the advisory board of the appellant bank.In December 1983, appellant agreed to loan the district $1,725,000.00 on condition that the district obtain sufficient individual guaranties to cover the amount of the note.

The district, through its commissioners, then approached various landowners whose farmland was benefited by the levees.McGaughey Brothers, Inc., owned several thousand acres of land which were so benefited.

In late 1983 two improvement district commissioners, William Pratt and John Conner, approached J.C. McGaughey seeking the guaranty of McGaughey Brothers, Inc., for a portion of the debt.At trial, both commissioners testified that Mr. McGaughey told them he did not have approval from his board of directors to sign for the corporation and that he either did not have authority, or doubted his authority, to sign on behalf of the corporation.Nevertheless J.C. McGaughey, as vice president for the corporation, did sign an agreement guarantying the repayment of $160,000.00 of the indebtedness.

At trial Mr. McGaughey admitted signing the guaranty ostensibly on behalf of the corporation, but contended that the commissioners were acting as agents for the bank in obtaining signatures to the guaranty agreement and thus their knowledge of Mr. McGaughey's statement concerning his lack of authority to bind the corporation should be imputed to First Commercial Bank.The trial court submitted the issue of agency to the jury, and the main issue on appeal is whether it was error to do so.We hold that the court should have ruled, as a matter of law, that the commissioners were not the agents of First Commercial Bank.

The relation of agency is created as the result of conduct by two parties manifesting that one of them is willing for the other to act for him subject to his control, and that the other consents to so act.The principal must in some manner indicate that the agent is to act for him, and the agent must act or agree to act on the principal's behalf and subject to his control.Evans v. White, 284 Ark. 376, 682 S.W.2d 733(1985);Crouch v. Twin City Transit, Inc., 245 Ark. 778, 434 S.W.2d 816(1968);Restatement (Second) of Agency§ 1 and comment a (1957).Ordinarily agency is a question of fact to be determined by the jury; but where the facts are undisputed, and only one inference can be reasonably drawn from them, it becomes a question of law.Evans v. White, 284 Ark. at 378, 682 S.W.2d 733;Campbell v. Bastian, 236 Ark. 205, 365 S.W.2d 249(1963).

Courts which have considered the specific issue presented here have held that when a bank directs a borrower to obtain the signature of another on a personal guaranty as a condition of making a loan, the act of the borrower in obtaining the signature is one for his own benefit and the borrower is not the agent of the bank.First National Bank of Denver v. Caro Construction Co., Inc., 211 Kan. 678, 508 P.2d 516(1973);CIT Financial Services, Inc. v. Gott, 5 Kan.App.2d 224, 615 P.2d 774(1980);Skrypek v. St. Joseph Valley Bank, 469 N.E.2d 774(Ind.App. 3 Dist.1984).

In Caro Construction, Nicholas Caro was the president and sole stockholder of Caro Construction Co., Inc.The corporation had successfully bid on a contract to build a post office building in Golden, Colorado.Mr. Caro applied to First National Bank of Denver for a loan to finance construction.The bank approved the loan on the condition that the note be personally guaranteed by Mr. Caro and his ex-wife, Betty.Nicholas Caro obtained his ex-wife's signature and the loan was made.When the corporation defaulted on the obligation, the bank sued Nicholas and Betty individually.Betty's defense was that Nicholas made misrepresentations of fact to her in order to obtain her signature on the guaranty, and because he was an agent for the bank the misrepresentations would be chargeable to the bank under the doctrine of respondeat superior.

The Kansas Supreme Court, quoting Swan Savings Bank v. Snyder, 124 Kan. 827, 262 P. 547(1928), said:

One who desires to borrow money at a bank, or to renew an indebtedness he has there, and who goes to another to get him to sign the note with him in order that he can get the bank to accept it, acts for himself and does not act for the bank.....

The Court in Caro continued:

The test in determining the existence of agency so the doctrine of respondeat superior is applicable, is the right to control the servant.

The bank had no control over Nicholas in procuring the signature of Betty, nor did the bank attempt to exercise any control.The bank merely required the signature of Betty and stated to Nicholas that if he wished to obtain the loan he would have to obtain her signature.The burden of proof was on Betty to establish by competent evidence the relationship of principal and agent.What constitutes agency and whether there is any competent evidence reasonably tending to prove its existence is a question of law.We conclude as a matter of law no agency existed between the bank and Nicholas Caro.[Citations omitted.]

In the case at barWallace Cunningham, the executive vice president for First Commercial Bank, testified that he handled the loan to the improvement district.He testified that the bank originally required that the commissioners themselves individually guarantee the debt.The commissioners declined to do so, and instead proposed that guaranties be obtained from landowners having property within the boundaries of the improvement district.

The guaranty agreement itself was apparently prepared in Mr. Pickens' office.Cunningham testified that the bank did not give any of the people representing the district any specific instructions about the execution of the loan documents.He said that, as far as he knew, the commissioners were the ones who decided who would sign the guaranty agreement and the amount of each individual's specific guaranty.

William Pratt testified that in meeting with Mr. McGaughey he was acting as a commissioner of the district.John Conner testified that First Commercial Bank gave him no instructions about any of the loan documents and that the bank did not have the power to control his actions with regard to the loan transaction.He testified that he was not acting on behalf of the bank, but rather in his capacity as a commissioner of the improvement district.

The relevant portion of Mr. McGaughey's testimony follows:

A.They[Pratt and Conner] wanted to sign a signature on a guarantee is what it amounted to.

Q.Who was the guarantee in favor of?

A.A bank in Little Rock.

Q.Was there anybody from the Little Rock bank present at the meeting?

A.No.Not that I--they didn't identify themselves as such.

Q.All right.Who at, who at the meeting had possession of this bank guaranty agreement?

A. John and Bill.[Conner and Pratt]

Q.Do you know how they had come to have or be carrying this guaranty agreement?

A.No, they had it.I, I don't know how they got it.

Q.Did you know who prepared it?

A.No, I didn't.

Q.What did they ask you to do with regard to the guaranty agreement?

A.They told me that the Little Rock bank was requiring signatures from landowners and they were collecting the signatures for them.

Q.For who?

A.For, for the Little Rock bank, they were--they were[30 Ark.App. 180] --it was a requirement from them that they have them before the loan would go through evidently.

Q.And they were carrying the guaranty agreement?

A.They, they had it on the--on the table, yes.

Q.What did they want you to sign for?

A.They wanted McGaughey Brothers to sign for $160,000.

* * * * * *

Q.At the time it was first presented to you in '83, J.C., who did you believe Bill or John, Bill Pratt or John Conner, to be acting on behalf of?

A.Well, these signatures were required and they were getting them for the bank they said.

Q.And so?

A. I--I believed them to be acting for the bank.

Q.Which bank?

A.Little Rock bank.

* * * * * *

Q.Mr....