Magale v. Fomby

• Decision Date: 04 February 1918
• Docket Number: 130,208
• Citation: 201 S.W. 278,132 Ark. 289
• Parties: MAGALE v. FOMBY
• Court: Arkansas Supreme Court

201 S.W. 278

132 Ark. 289

MAGALE v. FOMBY

No. 130, 208

Supreme Court of Arkansas

February 4, 1918

Appeal from Columbia Chancery Court; James M. Barker, Chancellor affirmed.

Decree affirmed. Motion for rehearing denied.

Gaughan, & Sifford, for appellant.

1. The directors were liable for mismanagement and neglect. 129 Ark 416; 168 N.Y. 157, 110 Ark. 40; 92 Id. 327.

2. No demand on the president and board of directors to bring this suit was necessary, as they were the guilty parties. 96 Ark 281; 126 Ark. 72; 2 Cook on Corp., § 701.

3. The suit was not barred by limitation. Plaintiffs had no knowledge of the loss. 71 Ark. 382; 196 S.W. 803; 39 L. R. A (N. S.) 173; 97 N.E. 897.

Stevens & Stevens, for appellees.

1. The demurrer was properly sustained. There was no gross negligence nor breach of trust. 104 U.S. 450, 460; 8 S.W 886; 17 F. 46; 96 Ark. 291; 126 Id. 72; 96 Id. 281; 104 Ark. 84. There are no allegations nor proof of fraud. Negligence must be proven. 15 L. R. A. 31.6; 18 A. 824; 46 N.J.Eq. 25. See also 75 F. 781; 15 L. R. A. 317; 55 Id. 775 and notes.

2. Mrs. Magale is estopped. She was informed of condition. She had no personal interest in the funds. 15 S.W. 449, 452; Cook on Stock, etc. (2 Ed.) 701.

3. The action is barred. Morowitz on Corp., § 271; 15 S.W. 448; 39 L. R. A. (N. S.) 49; 29 C. C. A. 529; 36 Id, 402. Directors are not express trustees. 15 S.W. 453; Morowitz on Pri. Corp., 271, etc. They are only gratuitous mandatories and only liable for fraud or gross negligence. 19 L. R. A. 316; 6 S.W. 586; 141 U.S. 133. See also 195 S.W. 674; 94 Ark. 429; 92 Id. 359, etc.

STATEMENT OF FACTS.

This is a suit in equity brought by Mrs. Mary G. Magale and John F. Magale, as stockholders of the Columbia County Bank, against C. M. Fomby and others, as directors of said bank, to recover for the bank for the benefit of its creditors and other stockholders, the sum of $ 30,000 for which they allege that the directors are liable by reason of their neglect and mismanagement of the affairs of the Bank in the respect averred in their complaint. The material facts are as follows:

In the early part of the year 1909, a corporation was organized at Magnolia, in Columbia County, Arkansas, for the purpose of operating a canning factory, and at once began doing business with the Columbia County Bank of the same place. J. O. Hutcheson was cashier of the bank and had $ 4,000 stock in it. He became a stockholder of the Magnolia Canning Factory and had $ 500 stock in it. C. M. Fomby was president of the bank. He had $ 3,000 stock in it and $ 100 stock in the canning factory. At the time the bank commenced to do business with the canning factory, the following were directors of the bank: R. L. Emerson, C. M. Fomby, A. B. Murphy, J. O. Hutcheson, C. R. Hutcheson, J. E. Smith, S. O. Couch, T. J. Blewster, D. R. Carrway, J. M. Witt, W. H. Aschew, C. W. Mitchell and J. C. McNeil. Since the institution of this suit the following of those named have died: A. B. Murphy, W. H. Aschew, A. J. Carter and R. L. Emerson. The balance of those first named, except J. E. Smith and S. O. Couch, served as directors from then on until the bringing of this suit.

T. J. Blewster had $ 110 of the canning factory stock and $ 1,000 of the bank stock. The cashier of the bank was a director in both companies, as were also T. J. Blewster and J. O. Hutcheson. A. J. Carter was president and T. J. Blewster was secretary of the canning factory. A. J. Carter became a director of the bank in 1910, and remained as such until his death in the year 1914. The property of the canning factory consisted of a canning outfit, buildings and machinery. The buildings were placed on leased lands so as to be near the railroad track and no provision was made for the removal of the buildings at the termination of the lease. The lease was for a period of nine years from August, 1908, at the price of fifty dollars per year. The canning factory had a capital stock of $ 10,500 which was paid up at the time it began to do business. The bank had a capital of $ 50,000 which was all paid. The original capital stock of the canning factory was expended in the erection of the buildings and the purchase of machinery in the preparation of operating its plant. The first loan from the bank to the canning factory was in the spring of 1909. This money was spent in buying machinery and getting ready for business. On the first of January, 1910, the canning factory was indebted to the bank in the sum of $ 13,497.00. At the close of January, 1911, the indebtedness was $ 20,314.00. On the first of January, 1912, the canning factory owed the bank $ 29,421.04. The indebtedness was evidenced by the notes of the canning factory, overdrafts and accounts. No security was given until the latter part of 1911, when the canning factory gave the bank a mortgage on its buildings and machinery. No profit was ever made on operating the canning factory. During all this time it was operated at a loss. The bank stopped business with the canning factory on December 15, 1911, and at that time the canning factory had very little manufactured goods on hand. The bank first took a mortgage for the whole amount of the indebtedness, but later on charged off $ 16,000.00 and took a new mortgage for the balance in 1913. Later on the stockholders of the bank paid this amount, which was something near $ 13,000, at the suggestion of the State Bank Examiner, in order that the bank might make a better showing. Mrs. Mary G. Magale gave her note for $ 1,000.00 of this amount and subsequently paid it.

J. O. Hutcheson was a director in both corporations. He testified that he talked with Mrs. Magale several times about the indebtedness of the canning factory to the bank; that he had his first conversation with her early in 1912, and later talked with her several times about it during the year.

J. C. McNeil, the cashier of the bank, testified that he talked with Mrs. Magale about the business with the canning factory in the years 1910, 1911 and 1912; that she frequently asked him about the bank's business and how the canning factory was getting along; that she talked with him frequently in the year 1912, and knew that the canning factory owed the bank a considerable debt and that there would be a loss.

Mrs. Magale denied that she knew anything about the indebtedness of the canning factory to the bank until the bank made a statement sometime in 1914. She said she gave her note for one thousand dollars with the understanding that she was to be paid back. At the time the suit was instituted, Mrs. Mary G. Magale owned eighty shares of stock in the bank of the par value of $ 2,000. Her son, J. F. Magale, owned $ 2,000 of the stock. The suit was filed on October 15, 1915. John F. Magale, at this time, was nearly twenty-three years of age. During 1912 and 1913, the canning factory was operated independently of any assistance from the bank, that is, the persons operating it guaranteed the bank from any loss and agreed to pay the profits, if any, upon the old indebtedness to the bank. No profits, however, were made and no payment was made upon the old indebtedness. H. D. Hutcheson was the manager of the canning factory during these years and he had no connection with the bank. The losses sustained by the canning factory were due to the hazards of the business rather than to any mismanagement of its officers. The record shows that the officers bent every energy toward making the canning factory a successful financial venture, but the losses occurred on account of the canning factory undertaking to raise products to be used in running its business and from the failures in the crops and from other hazards connected with its business.

The court found the issues in favor of the defendants and a decree was entered dismissing the complaint for want of equity. The plaintiffs have appealed.

OPINION

HART, J., (after stating the facts).

The cause of action set forth in the complaint is cognizable in a court of chancery. The liability of the directors of the bank for negligence in the discharge of their duties and the jurisdiction of courts of equity to afford redress to the corporation, and in proper cases to its shareholders, in cases of this sort exists independently of any statute. Bank of Commerce v. Goolsby, 129 Ark. 416, 196 S.W. 803. Actions to recover such losses should in general be brought in the name of the corporation, but if it refuses to prosecute the action, the stockholders who are the real parties in interest, will be permitted to sue in their own names. In the present case it appears that the corporation was still under the control of the directors who are defendants to the action. The president of the corporation stated that they would not have brought the action for the corporation, and the demand upon the corporation to have brought the suit would have been futile and unnecessary. A suit prosecuted under the direction and control of the parties against whom the misconduct is alleged and a recovery is sought, would not afford the shareholders the relief to which they are entitled. If the stockholders could not be allowed to assert their own rights in a court of equity, the directors so long as they remained in office, could hold them in defiance and their wrongful acts might lead to the wreck of the corporation.

Again it is argued that the officers were not liable. In the case of Bank of Commerce v. Goolsby supra, it was held that the directors of a bank, constituting its governing body, are liable to stockholders as well as depositors for its losses from their negligence in not knowing its condition and seeing that its affairs are honestly and properly managed. In the present case the capital stock of the canning...