In re Arkco Properties, Inc.

• Decision Date: 31 March 1997
• Docket Number: Bankruptcy No. 96-20371 S.
• Citation: 207 BR 624
• Parties: In re ARKCO PROPERTIES, INC.
• Court: U.S. Bankruptcy Court — Eastern District of Arkansas

207 B.R. 624 (1997)

In re ARKCO PROPERTIES, INC.

Bankruptcy No. 96-20371 S.

United States Bankruptcy Court, E.D. Arkansas, Helena Division.

March 31, 1997.

Susan Gunter, for Petitioner.

Allen Bird, for Respondent.

ORDER OF DISMISSAL

MARY D. SCOTT, Bankruptcy Judge.

On December 24, 1996, eight related debtors filed for protection under Chapter 11 of the Bankruptcy Code. The debtors include Arkco Corporation, Inc. ("Arkco") which is the 100% shareholder of the other seven debtors. A fifty percent shareholder of the debtor Arkco has filed a motion to dismiss each of the cases as being filed in bad faith and as being filed without the proper authority. Inasmuch as trial of the issue regarding authority would involve significantly fewer resources, the Court bifurcated the issues and now grants the Emergency Motion to Dismiss, filed on December 31, 1996.

In April 1987, Gregory Graham and W.T. Paine incorporated W.T.P., Inc., with W.T. Paine holding 100% percent of the shares of the company. The name of this corporation was changed on September 18, 1992, to Arkco Corporation, Inc. At that time, the number of directors for each of the corporations was also changed from one, W.T. Paine, to two, W.T. Paine and Garland Ridenour. Garland Ridenour was elected President of each of the eight corporations¹ and became a 50% shareholder of Arkco.

On April 12, 1994, at its annual meeting of shareholders, Arkco Corporation elected Garland Ridenour, Ann Lewis, and Wayne Crews as directors of each of the subsidiaries. The shareholders of Arkco met, and, although meetings were noticed and rescheduled over the next several months, no elections of directors were concluded by the shareholders. By Order of the state court, effective September 2, 1994, W.T. Paine was removed as a director of Arkco for a period of 18 months. On September 23, 1994, as the sole remaining director, Ridenour nominated and elected Wayne Crews to fill the unexpired term of W.T. Paine. The directors then elected Ridenour as Chairman of the Board and president of Arkco. On September 23, 1994, the shareholders of Arkco, W.T. Paine and Ridenour, elected directors for Arkco, namely Ridenour and Wayne Crews.

On April 10, 1995, numerous events occurred. First, at 2:30 p.m. each of the subsidiaries held a board meeting at which several resolutions were passed granting broad authority to Ridenour, as president, to "deal with" claims of W.T. Paine and to direct litigation involving the corporations. At the conclusion of the meeting of the board of directors, Ridenour accepted the resignation of the other two board members of the subsidiaries, Ann Lewis and Wayne Crews.

At 4:00 p.m. Ridenour called the meeting of the shareholder of the subsidiaries whereupon Ridenour took several actions purportedly under his authority as president. As president of the subsidiaries, he gave notice of a shareholder meeting to the sole shareholder, Arkco. As president of Arkco, he waived all notice requirements of the annual shareholder meeting; ratified all actions of the board taken within the last year; amended the bylaws, changing the number of directors from three to one; and, finally, unanimously elected himself as the sole director.

At 4:30 p.m. Ridenour called a meeting of the Board of Directors of each of the subsidiaries.² As the sole director he waived notice and elected himself president of each of the subsidiaries and elected Ann Lewis as Secretary.

On April 10, 1995, the Board of Directors of Arkco Corporation, then made up of Ridenour and Crews, also met, but earlier, at 2:00 p.m. At the conclusion of this meeting, Crews resigned as a director. Accordingly, a shareholder meeting was noticed for April 11, 1995, to, among other matters, elect new directors of Arkco. It does not appear that the meeting took place as scheduled. On April 28, 1995, however, the shareholders of Arkco elected as directors, Ridenour and Jimmie Paine. At the meeting of directors held immediately after the shareholder meeting, the directors each nominated and voted for themselves as president, and, accordingly were unable to elect a president. Thereafter, although Ridenour asserted control as "holder over" president, he blacked out his presidential title on the letterhead.

On December 20, 1996, Arkco and its counsel learned that the state court intended to enter judgment against Arkco and its subsidiaries in an amount in excess of two million dollars. The state court findings of fact and conclusions of law were filed on December 23, 1996. Accordingly, on December 23, 1996, Ridenour noticed a meeting of the shareholders, to be held on December 26, 1996, in hopes of obtaining authorization to file bankruptcy petitions for each corporation. On December 24, 1996, however, each of the corporations filed a skeletal Chapter 11 bankruptcy petition. Although the corporate records for each of the seven subsidiaries of Arkco Corporation reflect that on December 24, 1996, Garland Ridenour was acting under the purported authority as the sole director of each of the subsidiaries in authorizing the filing of a bankruptcy case, Ridenour admits that these documents did not, in fact exist when the bankruptcy cases were filed. Ridenour claims that he gave Jimmie Paine notice of the meeting for the 26th as a "courtesy." He did not, however, wait for the meeting to obtain the requisite corporate authority and, instead, authorized the filings two days earlier. The Court does not believe his explanation that he did not expect Mrs. Paine to appear at the meeting. Not only had he been expressly advised she would attend, the acrimonious history of the parties, together with the nature of the business of the meeting, made her attendance a certainty.

On December 26, 1996, a meeting of the Arkco board of directors was held at which time a motion that authorization for the filing of a bankruptcy case by Arkco be ratified failed.³ It is noteworthy that Ridenour went forward with the meeting noticed for December 26, 1996, and attempted to have his conduct ratified. Clearly, he knew the filings were unauthorized in the first instance.

Arkco and its seven subsidiaries are governed by the Arkansas Business Corporation Act of 1987 pursuant to their Articles of Incorporation, as amended. The Bylaws of each of the corporations provide in pertinent part:

3.01. Management. The business and affairs of the Corporation shall be managed by the Board of Directors who may exercise all such powers of the Corporation and do all such lawful acts and things as are not (by statute or by the articles of Incorporation or by these Bylaws) directed or required to be exercised or done by its shareholders.

5.01. (c) Officers named in Bylaw 5.01(a)(1) shall be elected by the Board of Directors on the expiration of an officer\'s term or whenever a vacancy exists. Officers and agents named in Bylaw 5.01(a)(2) may be elected by the Board at any meeting, whether regular or special.

(d) Unless otherwise specified by the Board at the time of his election or appointment, or in an employment contract approved by the Board, each officer\'s and agent\'s term shall end at the first meeting of Directors after the next annual meeting of shareholders. He shall serve until the end of his term or, if earlier, his death, resignation, or removal.

5.03. Vacancies. Any vacancy occurring in any office of the Corporation (by death, resignation, removal or otherwise) may be filled by the Board of Directors.

5.04. Authority. Officers and agents shall have such authority and perform such duties in the management by the Corporation as are provided in the Bylaws or as may be determined by resolution of the Board of Directors not inconsistent with these bylaws.

5.07. The President shall be the chief executive officer of the Corporation; shall preside at all meetings of the shareholders and, if the Chairman of the Board is absent, the Board of Directors; shall have general and active management of the business and affairs of the Corporation; and shall see that all orders and resolutions of the Board are carried into effect. He shall perform such other duties and have such other authority and powers as the Board of Directors may from time to time prescribe.

8.07. Amendment of Bylaws.

(a) These Bylaws may be altered, amended, or repealed at any meeting of the Board of Directors at which a quorum is present, by the affirmative vote of a majority of the Directors of the Corporation, provided notice of the proposed alteration, amendment, or repeal is contained in the notice of the meeting.

(b) These Bylaws may also be altered, amended or repealed at any meeting of the shareholders at which a quorum is present or represented, by the affirmative vote of the holders of a majority of the shares of the Corporation, entitled to vote thereon, provided notices of the proposed alteration, amendment or repeal is contained in the notice of the meeting.

Under the Bankruptcy Code, a case is commenced by the filing of a petition by any entity that may be a debtor under such chapter. 11 U.S.C. § 301. Corporations may be debtors under Chapter 11 of the Bankruptcy Code. However, corporations are creatures of statute and cannot act for themselves. They act through their agents who are required to act within their authority and in good faith.

The Court looks to Arkansas law to determine who has the authority to authorize a corporate bankruptcy case. Price v. Gurney, 324 U.S. 100, 65 S.Ct. 513, 89 L.Ed. 776 (1945); In re Giggles Restaurant, Inc., 103 B.R. 549 (Bankr.D.N.J.1989). Under Arkansas law corporations are managed by or under the direction of its board of directors. Ark.Code.Annot. § 4-27-801; Horner v. New South Oilmill, 130 Ark. 551, 197 S.W. 1163 (Ark.1917). Statutes with similar language have been held to authorize the board of directors to file a petition in bankruptcy. See Boyce v. Chemical Plastics, Inc., 175 F.2d 839, 843 (8th Cir.1949), cert. denied, 338 U.S. 828, 70 S.Ct....