Hernandez v. Banco De Las Americas

• Decision Date: 05 October 1977
• Docket Number: No. 12946-PR,12946-PR
• Citation: 116 Ariz. 552,570 P.2d 494
• Parties: Paul R. HERNANDEZ, Appellant, v. BANCO DE LAS AMERICAS, a corporation, Appellee.
• Court: Arizona Supreme Court

Page 494

570 P.2d 494

116 Ariz. 552

Paul R. HERNANDEZ, Appellant, v. BANCO DE LAS AMERICAS, a corporation, Appellee.

No. 12946-PR.

Supreme Court of Arizona, In Banc.

Oct. 5, 1977.

Stompoly & Even by John S. Stompoly and James L. Stroud, Tucson, for appellant.

Russo, Cox, Dickerson & Cartin by Jerold A. Cartin, Tucson, for appellee.

HOLOHAN, Justice.

This case involves a suit by appellant (Paul Hernandez) against appellee, Banco De Las Americas (Banco), for damages arising out of an alleged illegal breach of contract for Hernandez' employment by Banco in 1973. After four days of trial, the trial court directed a verdict for Banco on all issues raised in the complaint except for granting plaintiff five days' contract damages and assessed jury costs against him. Plaintiff appealed only that portion of the judgment denying him damages for breach of contract. Banco attempted to appeal the trial court's finding of a valid contract by a cross assignment of error. ¹ The Court of Appeals reversed the judgment below.

We granted review because this case involves the need for clarification of certain statements made in Tucson Federal Savings & Loan Ass'n v. Aetna Investment Corp., 74 Ariz. 163, 245 P.2d 423 (1952) regarding corporate employment contracts. The opinion of the Court of Appeals is vacated.

Appellee Banco is a banking corporation which has been licensed in Arizona since 1971. Pursuant to Article I, Section 1 of Banco's By-Laws, the bank's annual meeting of stockholders was held in early June of 1972, and a Board of Directors was elected to serve for a term of one year. On July 19, 1972 the Board of Directors entered into a written contract with Morris Herring (one of the original incorporators) calling for the employment of Herring as Bank President for a period of one year at a salary of $25,000.

Dissention apparently developed between Herring and a majority of the Board during the year, and on April 5, 1973, Herring wrote the Chairman of the Board setting forth the terms of an agreement reached between him and the Board regarding his resignation. The agreement, as approved by the Board, included inter alia a provision that Herring was to be paid a lump sum at the time of his resignation representing "the unpaid balance of my annual salary due under the terms of my contract dated July 19, 1972." Eleven of the fifteen Board members approved and accepted Herring's resignation on the stated terms at a special meeting of the Board of Directors of Banco held on April 8, 1973.

The Chairman of the Board thereupon appointed a committee comprised of several members of the Board to search for a permanent president for the bank. The record reflects that during the time that the committee was searching for a new bank president, Morris Herring launched a proxy fight in an attempt to elect a new board.

Meanwhile, the committee's search for a president had come to fruition in the selection of the appellant, Paul Hernandez, as President of the bank on June 1, 1973. The corporate minutes reflect that a special meeting of the Board of Directors of the bank, attended by nine members, was held on June 1, 1973. At that meeting the Chairman of the Board recommended that a one-year contract be entered into between Banco and Hernandez. All nine members of the Board of Directors in attendance at the special meeting on June 1, 1973 voted to offer Hernandez a contract. ²

Banco by and through its Chairman, George Sandoval, then entered into a written contract of employment wherein Hernandez was to serve as President of the bank for one year commencing June 1, 1973 and terminating May 31, 1974. In addition to the one-year term of employment the contract provided inter alia that Hernandez accepted and agreed to his hiring, engagement and employment in accordance with the customary requirements of the position, including the Articles of Incorporation, the By-Laws and appropriate regulatory agency directives. The contract also provided that its interpretation would be according to the laws of the State of Arizona.

Hernandez began his duties as President of the bank on June 1, 1973. On June 4, 1973, however, the Herring faction was successful in its proxy fight and a Board favorable to it was elected. On June 8, 1973 the newly elected Board of Directors met, discharged appellant Hernandez, and reappointed Morris Herring President of the bank.

This case presents essentially one issue, namely, whether the Board of Directors had authority to enter into a valid and binding employment contract with appellant which would be binding beyond its term of office.

There is no doubt that the Board of Directors of Banco had the express authority to make and enter into valid and binding contracts. The main contention of Banco is that the Board as constituted prior to June 4, 1973 did not have the authority to enter into a valid employment contract binding the subsequent Board. Banco has relied heavily on the statement in Tucson Federal Savings & Loan Ass'n v. Aetna Investment Corp., supra "The directors of the Tucson Federal are elected for a three-year term, while this contract was to remain in force and effect for ten years from the date of its execution. It is contended by Tucson Federal that the contract is void for the reason that it extends and binds the corporation beyond the terms of the then acting officers and directors. To support this proposition we are referred to Edwards v. Keller, Tex.Civ.App., 133 S.W.2d 823; Clifford v. Firemen's Mut. Benev. Ass'n, 232 A.D. 260, 249 N.Y.S. 713; Massman v. Louisiana Mfg. Cooperage Co., 177 La. 999, 149 So. 886; Kline v. Thompson, 206 Wis. 464, 240 N.W. 128. We have examined these cases and find they all involve employment contracts whereby the corporate officers have attempted to employ a person for a period extending beyond their terms. The courts held that the contracts were void because one board of directors cannot bind subsequent boards as to future personnel to carry out administrative details of the corporation. These cases limit the application of the rule to employment contracts, which we believe is sound." 74 Ariz. at 170, 245 P.2d at 427.

Tucson Federal concerned the effect to be given a contract to buy and sell insurance which was of 10 years' duration, where the board which negotiated the contract served for a three-year term. Our comments on corporate employment contracts must be considered dicta. This is the first instance in which we have been faced with the issue of an employment contract extending beyond the term of the Board of Directors. Under the circumstances we find no obstacle to considering the matter as one of first impression in this jurisdiction.

It is asserted by Banco that the contract made between the Board of Directors and Hernandez was void because it was in contravention of the By-Laws which provide that officers are to serve for one year during the term and at the pleasure of the Board of Directors. ³ We note that the identical By-Law was in effect at the time of Herring's contract. ⁴

There are two theories which support the conclusion that the Hernandez contract was valid although it extended beyond the Board's term. One theory centers on the conclusion that the Board by its prior acts with regard to Herring informally altered or modified the By-Laws. The other theory concludes that because the Board had the authority under the By-Laws to alter the By-Laws at any time, the Hernandez contract was pro tanto a modification which prevailed over the By-Laws.

The Articles of Incorporation gave the Banco Board of Directors the power to amend by-laws; ⁵ further, Article X of the By-Laws provides:

"The Directors may, at any regular meeting, alter or amend these By-Laws, in a way not inconsistent with the law, provided that the number of...