Little Red River Levee District No. 2 v. Garrett

• Decision Date: 29 May 1922
• Docket Number: 21
• Parties: LITTLE RED RIVER LEVEE DISTRICT No. 2 v. GARRETT
• Court: Arkansas Supreme Court

242 S.W. 555

154 Ark. 76

LITTLE RED RIVER LEVEE DISTRICT No. 2 v. GARRETT

No. 21

Supreme Court of Arkansas

May 29, 1922

Appeal from White Chancery Court; John E. Mar-tineau, Chancellor reversed in part.

Decree reversed. Rehearing granted.

Culbert L. Pearce, John E. Miller and C. E. Yingling, for appellant.

That part of the decree awarding the fourth issue of bonds to appellant is supported by the law and the evidence. The burden was on appellee to show that the bank purchased these bonds in good faith and paid value therefor. 82 Conn. 333 135 Am. St. Rep. 278; 149 Wis. 413, 136 N.W. 549. The bank had knowledge of the infirmities of the bonds, as the knowledge of Long and Er-ganbright is imputable to the bank. 7 R. C. L. 658, sec. 659; 77 Ark. 172; 107 Ark. 250; 147 Mass. 268, 9 Am. St. Rep. 698; 118 Ill. 625. Where a person as an officer of a corporation deals with himself individually, the corporation being represented by no one except the person himself, the corporation will be chargeable with notice of any knowledge possessed by the officer. 22 S.W. 1056; 90 Iowa 554; 121 Mass. 490; 64 Mo.App. 527; 4 S.D 312; 60 F. 78; 97 Ga. 527; 112 Ga. 823; 72 N.Y. 286; 32 Hun 105; 28 R. I. 41; 20 S.W. 1119; 12 F. 686, and many other cases cited by appellant.

The district was not liable to the bank on the bonds because they were stolen from the district by the bank officials. 95 Me. 553, 55 L. R. A. 730.

The bank was liable for the misappropriation of the proceeds of the sale of the third issue bonds, which went to the individual credit of Erganbright, under the general rule that if the bank has knowledge that a breach of trust is being committed by the improper withdrawal of funds, it incurs liability. Many of the cases above cited are applicable, but in addition, see 3 R. C. L. p. 550, sec. 177; 136 Ark. 442; 135 Ark. 291; 69 Ark. 43; 18 Tex. 811; 129 Ga. 126; 82 Conn. 8; 211 Mass. 409; 1914-B Ann. Cas. 677; 1917-F, L. R. A. (N. S.) 300.

Brundidge & Neelly, for appellee.

The knowledge of Erganbright that long had no authority to sell the bonds is not imputable to the bank. The rule that a corporation is not bound by the knowledge of its officers, where an officer is acting in his own interests, instead of that of the bank, is sustained by the weight of authority. The following cases are in point: 3 R. C. L. pgs. 478-9; 140 Ark. 67; Id. 367; 100 F. 705; 191 F. 657; 180 F. 687; 118 F. 800; 147 Mass. 268; 239 F. 704; 240 F. 114; 178 F. 57; 2 Pomeroy's Eq. Jur. (3d Ed.) par. 675; 190 F. 136; 6 A. & E. Ann. Cas. 675; 6 A. L. R. 237, and many others cited by appellee.

Fraud is not presumed, but must be proved, and the burden of proving the bonds were not sold is upon appellant.

OPINION

MCCULLOCH, C. J.

The First National Bank of Judsonia, domiciled at the town of Judsonia, in White County, continued to do business until June 3, 1920, when it was found to be insolvent, and its affairs were taken over by a receiver appointed by the National Comptroller of the Currency. C. M. Erganbright was the president of the bank, and C. F. Long was its cashier. They were the managing officers of the bank, and, according to the testimony in the present litigation, they exercised complete control over the affairs of the bank, without accounting to any other officers or board. Long resigned as cashier in December, 1919, on account of criticism from a bank examiner, but he continued in joint control with Erganbright over the affairs of the bank.

After the bank failed it was discovered that it had been wrecked by these two parties who controlled it. It was found that they were manipulating the affairs of the bank for their own purposes, and had robbed the bank to the extent of nearly $ 100,000. The books and accounts of the bank were left in obscurity on account of the manipulation of the various accounts by Erganbright and Long to cover up their unlawful and fraudulent transactions.

Appellant Little Red River Levee District No. 2 of White County, is an improvement district organized under the statutes of this State for the purpose of constructing and maintaining a levee along certain stretches of Little Red River. Erganbright and Long and T. J. Pryor were the three directors of the district, and the accounts of the levee district were carried with the bank controlled by the two directors, Erganbright and Long. These parties, it appears from the testimony, dominated the affairs of the levee district as they did those of the bank.

There were four separate bond issues by the levee district. The last issue of $ 20,000, and the proceeds of the sale of a portion of the third issue are involved in the present litigation.

The transactions which form the subject-matter of this controversy run back to June 30, 1917, and it is conceded that on that date the levee district owed the bank the sum of $ 10,610.60 on overdrafts. It is also undisputed that subsequent to that date the bank purchased from Erganbright and Long third-issue bonds of the levee district aggregating the sum of $ 35,000, face value, and that the proceeds thereof--$ 34,000--were credited to the personal account of Erganbright. It is claimed on the part of the district that $ 5,000 more of that issue of bonds was purchased in the same way, but there is a controversy on that point.

In August, 1919, it was determined by the directors of the levee district that another bond issue of $ 20,000 was necessary to make certain repairs on the levee, and the bonds, in denominations of $ 500 each, were actually printed and signed, but the board then determined not to use the bonds, but to postpone the needed repairs until a more propitious time. Erganbright and Long took the bonds and placed them in the vaults of the bank for safekeeping, and the bonds have remained there until the present moment, having passed into the hands of the receiver when he took charge.

It appears that on December 10, 1919, notwithstanding the fact that the bonds were not to be put into circulation, but were to be safely kept in the vault of the bank, Erganbright and Long credited $ 18,000 to the levee district as the market value of the bonds, and this entry was made on the books of the bank as a purchase of the bonds by the bank. The proof shows that this was done solely for the purpose of covering up fraudulent transactions of Erganbright and Long and to balance up their accounts as nearly as possible. The funds thus credited were used by Erganbright and Long for purposes, according to the testimony, other than for the use of the levee district. At any rate, according to the preponderance of the evidence, the funds were not expended for the benefit of the district.

This action was instituted by the levee district against the receiver of the bank to cancel the alleged sale and transfer of the bonds to the bank and to recover possession of the bonds, and also to have an accounting with the bank as to the funds of the district received by the bank subsequent to June 30, 1917.

In the complaint it is alleged that the fourth-issue bonds were fraudulently put into circulation by Ergan-bright and Long, without authority and for their own purposes, and that the bank received the same without consideration and with knowledge of the fraudulent purposes of said parties. It is also alleged in the complaint that the bank purchased $ 35,000 of the third-issue bonds and wrongfully placed the proceeds of the purchase to the credit of Erganbright, and that, after allowing credits due the bank, the latter was indebted to the levee district in the sum of $ 35,000.

The receiver answered denying the charge relied upon by appellant, and alleged that the bank purchased the fourth-issue bonds for a valuable consideration and was an innocent purchaser thereof, and also alleged that the bank was not indebted to the levee district in any sum, but that the district was indebted to the bank in the sum of $ 19,367.03.

There was a trial of the issues before the chancery court, and there was a decree in favor of appellant for the cancellation of the sale of the fourth-issue bonds, but the court dismissed appellant's complaint as to the prayer for the recovery of the proceeds of the former bond issue, and also dismissed the cross-complaint of the receiver against appellant. A cross-appeal has been prosecuted by the receiver.

The facts alleged by appellant with respect to the fraudulent use of the fourth-issue bonds by Erganbright and Long are established by the overwhelming weight of the evidence.

It is undisputed that Erganbright and Long looted the bank and had been engaged in that nefarious enterprise for several years. They had also been controlling the affairs of the levee district and using its funds for their own purposes for several years. They both fled the country the night before the bank went into the hands of a receiver, and Long has never returned or been heard of since that date. Erganbright returned and was in-dieted in the United States District Court and is now serving a term in the Federal prison. He testified as a witness in this case, and made no attempt to explain or excuse his wrong-doings. He admitted that he and Long had no authority to use these bonds, and he denied having used them in any way, and claimed that they still remained in the vault of the bank merely for safe-keeping. The testimony shows, however, that the price of the bonds was credited to the levee district on December 10, 1919, and there was a deposit slip for the amount in Erganbright's own handwriting. It is shown also that he signed the report of the bank examiner to the Comptroller of the Currency specifying these bonds as part of the assets of the bank.

The testimony of Erganbright is, of course unreliable, but it merely...