First Nat. Bank of Lawrence County v. Higginbotham Funeral Service, Inc.

• Decision Date: 06 November 1991
• Docket Number: No. CA,CA
• Citation: 36 Ark.App. 65,818 S.W.2d 583
• Parties: FIRST NATIONAL BANK OF LAWRENCE COUNTY, Appellant, v. HIGGINBOTHAM FUNERAL SERVICE, INC., Appellee. 90-487.
• Court: Arkansas Court of Appeals

Page 583

818 S.W.2d 583

36 Ark.App. 65

FIRST NATIONAL BANK OF LAWRENCE COUNTY, Appellant, v. HIGGINBOTHAM FUNERAL SERVICE, INC., Appellee.

No. CA 90-487.

Court of Appeals of Arkansas,

En Banc.

Nov. 6, 1991.

Dick Jarboc, Walnut Ridge, for appellant.

Allan W. Horne, Little Rock, for appellee.

ROGERS, Judge.

On May 26, 1989, appellant, First National Bank of Lawrence County, filed suit in the Lawrence County Circuit Court against appellee, Higginbotham Funeral Service, Inc., and William Carter Higginbotham, individually, to collect on a note executed in 1987 that was past due. On August 28, 1989, a consent judgment was signed by the trial judge and entered of record as presented by appellant's attorney, and David Mullen, who purportedly represented as counsel both Carter Higginbotham and the appellee-corporation.

On September 9, 1989, appellee filed a motion to set aside the consent judgment pursuant to Ark.R.Civ.P. 60 on grounds of preventing a miscarriage of justice and fraud in the procurement of the judgment, based on the claim that the employment of David Mullen to represent the corporation was unauthorized and that Mullen was without authority to consent to judgment on its behalf. As a meritorious defense, appellee asserted that the note upon which the appellant's claim was based was executed without its authority, and was thus null and void. In its response to the motion, appellant pled laches, waiver, estoppel and ratification. The hearing of this matter was not held until September of 1990. Based on a finding of fraudulent conduct on the part of appellant in obtaining the judgment, the trial court set aside the consent judgment as to appellee and granted a new trial, but the court left intact the judgment against Carter Higginbotham, who took no part in the hearing.

Appellant appeals from the trial court's order granting appellee's motion to set aside the consent judgment. Appellant raises two issues for reversal, arguing that appellee was estopped from setting the judgment aside; and that appellee ratified the action of Carter Higginbotham in hiring David Mullen and that the trial court erred in finding that there was clear evidence of fraud. We affirm on all issues.

It will be necessary to recite in some detail the factual background of this case in order to fully understand the questions raised on appeal. The record discloses that appellee, Higginbotham Funeral Service, Inc., is a close corporation which was formed in 1968 by W.C. Higginbotham and his family, and has branches located in Walnut Ridge and Hardy, Arkansas. In 1981, W.C. and his wife, Mary Jo, were divorced, and in the divorce settlement, W.C. was given control over the Walnut Ridge branch, while Mary Jo was given control of the Hardy operation. W.C. died sometime in 1987.

Roughly six weeks before the appellant filed the instant lawsuit in circuit court, David Mullen, at the behest of Carter Higginbotham [hereinafter "Carter"], who is W.C. and Mary Jo's son, filed an action in the Lawrence County Chancery Court for declaratory judgment on behalf of the corporation against Mary Jo. In the complaint for declaratory judgment, it was alleged that the board of directors had unanimously agreed to sell all real and personal property comprising the Hardy assets of the corporation; that Mary Jo had by letter objected to this action, considering unlawful any decision by the board, as she deemed herself the only lawful director of the corporation; and that the prospective purchaser was unwilling to go forward with the purchase until the matter was settled. Therefore, it was asked of the chancellor to declare that the board was lawfully constituted, and that the decision of the board to sell the assets of the Hardy branch was valid.

Thereafter, on June 1, 1989, Mary Jo filed a third-party complaint in the declaratory judgment action against Carter, both individually and as executor of W.C.'s estate. The third-party complaint contained the allegations that certain shares of the corporation had been transferred to Carter and Hazel Best in violation of the Articles of Incorporation; that Carter had taken control of the Walnut Ridge operation; that Carter and Hazel Best had purported to act as elected officers and directors of the corporation and had purported to take action in the name of the corporation, such as by obtaining loans and expending corporate funds and assets; that such acts were in violation of the Articles of Incorporation and were without authority, or in excess of authority, and were null and void; and, that Carter had undertaken to employ David Mullen as the attorney for the corporation, an undertaking for which he was without authority.

On June 20, 1989, David Mullen filed an answer to appellant's complaint in circuit court on behalf of appellee and Carter, admitting the indebtedness owed to appellant.

Trial of the declaratory judgment and third-party complaint was had on August 4, 1989, and on August 17th, the chancellor ruled that Mary Jo was the only duly elected member of the board of directors, and that Carter and Hazel Best were not validly elected officers or directors of the corporation. The chancellor enjoined the two from conducting any further activities on behalf of the corporation.

The consent judgment at issue here was entered on August 28, 1989, which was after the chancellor's ruling in the other lawsuit; however, it is undisputed that neither appellant, nor Mullen knew of that decision when the consent judgment was entered, on the day the case was set for trial. By virtue of this settlement, appellant was awarded judgment jointly and severally against appellee and Carter in the amount of $108,087.62 with interest accruing at the rate of $30.33 per day, together with costs and an attorney's fee of $3,000.

Since the issue of fraud was the primary subject of our discussion in conference, we will address that issue first. Rule 60(c)(4) of the Arkansas Rules of Civil Procedure authorizes the trial court to modify or vacate an order, at any time, for fraud practiced by the successful party in obtaining the judgment. The Rule thus permits vacation or modification of an order after ninety days only in cases of fraud practiced upon the court in obtaining the judgment. See Smart v. Biggs, 26 Ark.App. 141, 760 S.W.2d 882 (1988). The fraud for which a decree will be canceled must consist in its procurement and not merely in the original cause of action. Alexander v. Alexander, 217 Ark. 230, 229 S.W.2d 234 (1950). It is not sufficient to show that the court reached its conclusion upon false or incompetent evidence, or without any evidence at all, but it must be shown that some fraud or imposition was practiced upon the court in the procurement of the decree, and this must be something more than false or fraudulent acts or testimony the truth of which was, or might have been, an issue in the proceeding before the court which resulted in the decree assailed. Id. Even though the fraud that vitiates a judgment may be constructive rather than actual, constructive fraud is nonetheless a species of wrongdoing. Ark. State Hwy. Comm'n. v. Clemmons, 244 Ark. 1124, 428 S.W.2d 280 (1968). Constructive fraud is defined as a breach of a legal or equitable duty which, irrespective of the moral guilt of the fraud feasor, the law declares fraudulent because of its tendency to deceive others. Neither actual dishonesty nor intent to deceive is an essential element. See RLI Ins. Co. v. Coe, 306 Ark. 337, 813 S.W.2d 783 (1991). The party seeking to set aside the judgment has the burden of showing that the judgment was obtained by fraud, see Karam v. Halk, 260 Ark. 36, 537 S.W.2d 797 (1976), and the charge of fraud must be sustained by clear, strong, and satisfactory proof. Ark. State Hwy. Comm'n. v. Clemmons, supra.

From the testimony and exhibits introduced at the hearing, it was revealed that appellant, through its representatives, had knowledge of the controversy surrounding the control of the corporation. Specifically, it was shown that appellant was aware of the declaratory judgment action as early as May 17, 1989, which was before its own complaint was filed, and it was shown that appellant had received a copy of Mary Jo's third-party complaint within days of its filing, in which the question of both Carter and Mullen's authority to act was specifically challenged. There was also evidence that appellant itself was concerned about the problems within the corporation, as on May 19, 1989, the appellant advised Carter that no further loans would be extended due to the uncertainty as to who were the proper directors of the corporation.

The trial court made its ruling from the bench, stating:

In that motion to set aside the judgment, we have to determine if in fact there was fraud practiced by the successful party, which is the bank, not necessarily Carter Higginbotham, but the bank.

. . . . .

In looking at the issues and reading the rule about five, six, seven times and listening to your arguments and reading your briefs, the Court is going to rule that the motion to set aside the judgment is going to be granted in that there is some evidence of fraud on the part of the bank. It does not mean fraud like we think of fraud, it means that there was a judgment submitted to me through David Mullen of which the bank or there's evidence that the bank had some knowledge that this was not properly done.

As indicated by these comments, the trial judge found that appellant had practiced a constructive fraud on the court in obtaining the judgment. The appellant possessed the knowledge of the other proceedings and the challenge to Carter's authority, from which Mullen's representation was derived. Nevertheless, a consent judgment was entered into with these parties and presented to the court for signature without revealing to the court that there were questions over control of the corporation. We believe that under these...