Hi-Pro Fish Products, Inc. v. McClure

• Decision Date: 03 December 1963
• Docket Number: No. LR 61 C 182.,LR 61 C 182.
• Citation: 224 F. Supp. 485
• Parties: HI-PRO FISH PRODUCTS, INC., et al., Plaintiffs, v. Robert Y. McCLURE, Defendant.
• Court: U.S. District Court — Eastern District of Arkansas

224 F. Supp. 485

HI-PRO FISH PRODUCTS, INC., et al., Plaintiffs, v. Robert Y. McCLURE, Defendant.

No. LR 61 C 182.

United States District Court E. D. Arkansas, W. D.

December 3, 1963.

Robert J. White, of White & Young, Russellville, Ark., for plaintiffs.

W. Dane Clay, of Rose, Meek, House, Barron, Nash & Williamson, Little Rock, Ark., for defendant.

YOUNG, District Judge.

This is a diversity action brought by nine of the eighty-six creditors of Commodities, Inc. (hereinafter referred to as Commodities), a bankrupt corporation, against the principal officer-director-stockholder, Robert Y. McClure. In the complaint, plaintiffs alleged that Commodities became indebted to them and that the ensuing insolvency and inability of the corporation to pay its obligations to them was "caused and brought about by the negligence and mismanagement of its managing officer," the defendant. Plaintiffs further alleged that the "wrongful, unlawful, negligent and careless conduct" of the defendant was a "pretense * * * to obtain money and credit from suppliers with the intent * * * to avoid payment therefor." The case was tried before the Court and briefs were submitted from both sides in support of their respective contentions as to the relevant factual and legal issues involved.

Commodities was incorporated as an Arkansas corporation on January 9, 1957¹, and operated under the wing of McClure Gin Co. until sometime late in 1957 or early in 1958, at which time the corporate offices were moved from Dardanelle, Arkansas to Russellville, Arkansas. The move was brought about by the expansion of the operations of Commodities. Commodities had commenced operations with operating capital of $300.00. The financial statement prepared by Mr. Norman Crouch for the year ending March 31, 1958, reflected a gross income of $1,500,000 with a net profit of slightly less than $1,000.

The nature of the operations of Commodities was the buying and selling of commodities such as soybeans, fishmeal, poultry feeds, etc. However, corporate income was derived not only from the sale of commodities but also from the transportation of these commodities. The success of the operations depended on a big volume of sales and the constant hauling of loads by the trucks. A typical run of a truck was to pick up a load of soybean meal in Memphis to be delivered in Texas and there pick up fishmeal to be hauled to Minnesota, and there pick up feed to be hauled to the Gulf Coast, etc.

Because of the nature of the operations, Commodities was divided into a trading division, which handled the purchases and sales of commodities, and the trucking division, which handled the transportation of the commodities from the source of supply to the purchaser. The trading division was run by Mr. Bronson Woodworth from late 1958² up through May or June of 1959. The trucking division was run by Mr. Jack Presley from August or September 1958 to the date of the filing of bankruptcy of Commodities on September 26, 1959. Mr. Harley Woods and Mr. Tom Callins were both employed in the sales division, and Mr. Callins worked in the transportation division.

The books of Commodities were set up by Mr. Norman Crouch, who left his employment shortly thereafter. Considable difficulty was encountered in obtaining competent employees to maintain the books. Mr. Tom Callins, Mr. Tom Loss and Miss Bonnie Harper maintained the books at different times. Miss Harper kept the books from January 1959 until the date of bankruptcy.

The defendant was the principal officer, director and stockholder of Commodities, Inc. The defendant testified that he had been in business since 1948; that he had experience in the gin and grain business; that he had experience in a managerial position; that he had been on the Board of Directors of Arkansas Valley Feed Mills for four or five years; that he had borrowed money from lending institutions before; and that he understood how to read a balance sheet.

According to the testimony of Miss Harper, who went to work as a bookkeeper in January 1959, and who maintained the books until late September 1959, Commodities experienced financial difficulties for the duration of her employment. Her observation was based on the fact that the checks made by the corporation were repeatedly returned unpaid. She stated that she was directed by the defendant to write checks with insufficient funds, with the idea that in the few days interim Commodities would obtain the money from the accounts owing to Commodities.

Mr. Callins, who started to work in January 1959, testified that when he started to work the books reflected numerous transactions that did not show whether there had been any payment made by Commodities in the case of accounts payable, or whether there had been a collection in the case of accounts receivable. Mr. Callins advised the defendant at the time that the creditors were pressing for payment. Sometime during March or April of 1959, the defendant's wife started working on the books to determine what accounts were outstanding, and in some cases it was never determined whether there had been a collection.

Mr. Callins also testified that the defendant would come in for a while one day and a while the next day; but he was there more later than at first.

According to Mr. Jack Presley's testimony, the first indication of financial difficulties was not until August 1959, and prior to that time his division was in good financial condition; yet, he readily admitted that he did not know whether the trucks were earning a profit on their hauls. Obviously, he was not acquainted with the internal cash flow of the trading division, which was the life blood of the corporation. To a similar effect, Mr. Wood, a salesman from April 1, 1957 to September 6, 1959, was unaware of the financial difficulties; yet, he also was not acquainted with the internal books and records which reflected the financial condition of the trading division.

It clearly appears from the testimony of the defendant's wife, Mrs. McClure, that discrepancies on the books became apparent at least sometime in the spring of 1959, when she attempted to straighten out the books, and she was advised by Mr. Callins of a shortage of invoices, absence of any collections in some transactions, erroneous entries on the contracts, and missing weight tickets. On the other hand, the defendant testified that he was well versed on the maintenance of the records of Commodities and that he regarded the business as in a sound and solvent condition up until the time he was informed in June 1959 of the many unpaid accounts; and it was not until then that he ordered an internal audit to be performed in order to ascertain the existence of any uncollected accounts receivable. Although the internal audit of June 1959 revealed a $1,000 deficit, the defendant testified that he was not worried because he knew of another $14,000 account receivable which was not included on the audit and would make up the deficit.

All of the debts now sued on by the plaintiffs were incurred on or after June 27, 1959.

The defendant went on vacation sometime in August 1959, and he testified that before he left he had reason to believe that one of his employees had been guilty of improper practices.³ In his own words, the defendant stated that he retained this individual whom he had suspected of improper practices since he "* * * had confidence in him as long as he was watched."

It was not until August 1959 that the defendant engaged a certified public accountant to attempt to run down the uncollected accounts receivable.⁴ The certified public accountant compiled a list of unpaid accounts receivable in addition to those found in the internal audit of June 1959. This accountant testified at the trial that although the balance sheet of March 31, 1959 reflected that the corporation was insolvent by $704.67, the net deficiency in the capital accounts, any substantial collection of these unpaid accounts would make the company solvent.

According to the testimony of the certified public accountant who was employed by the plaintiffs sometime during the fall of 1959 to examine the books of Commodities, the books were inadequate to reflect the financial condition of the corporation. Many records were missing and the corporation, except for five months, showed an overdraft each month varying in amounts of $6,900 to $66,000. During the years 1957 and 1958, loans were made to McClure Gin Co., as well as to the defendant, without interest. Numerous erasures were noted on the financial records of Commodities. He stated that as of March 31, 1959 the balance sheet reflected that Commodities was insolvent.

At the close of the plaintiff's case, the defendant made a motion to dismiss, contending inter alia, that since the proof offered by plaintiff did not establish any fraud and only raised the question of negligence, the case should be dismissed since under Arkansas law there is no cause of action in favor of a creditor against a corporate officer-director of a bankrupt corporation for negligence and mismanagement unless suit is brought by the trustee in bankruptcy for the benefit of all the creditors, or unless there has been a showing that the trustee has refused to bring suit. Pursuant to the Court's reserving its ruling on this motion, the defendant presented its case, and the trial was concluded.

The rule in Arkansas with respect to the standard of care required by a corporate director in the management of corporate affairs appears to be the rule requiring ordinary care, as earlier announced in Briggs v. Spaulding, 141 U.S. 132, 152, 11 S.Ct. 924, 35 L.Ed. 662 (1891), and followed by the Arkansas Supreme Court in a case involving the alleged negligence of a bank director, Sternberg v. Blaine, 179 Ark. 448, 17 S.W.2d 286 (1929). This is the rule applied by the Court in Johnson v. Coleman, 179 Ark. 1087, 20 S.W.2d 186 (1929), a case involving the alleged negligence...