Merriman v. Smith
| Citation | 599 S.W.2d 548 |
| Parties | Joe Jack MERRIMAN, Plaintiff-Appellant, v. Robert B. SMITH, Jr., Individually, Robert B. Smith, III, Individually, Jerrell H. Parchman, Individually, Billy Jack Goodrich, Individually, C. R. Womack, Individually, C. U. Cochran, Jr., Individually, George A. Smith, Individually, Grady Arnold, W. T. Badgett, R. E. McKenzie, and B. G. Spain, Partners, d/b/a Arnold & Badgett, Griff A. Dodds, H. L. Townsend, Sr., W. A. Whitsett, P. A. Turner, and Orville F. Rush, Defendants-Appellees, and CONTINENTAL BANKERS LIFE INSURANCE COMPANY, Plaintiff-Appellant, v. Robert B. SMITH, Jr., Individually, Robert B. Smith, III, Individually, Jerrell H. Parchman, Individually, Billy Jack Goodrich, Individually, C. R. Womack, Individually, C. U. Cochran, Jr., Individually, George A. Smith, Individually, Grady Arnold, W. T. Badgett, R. E. McKenzie, and B. G. Spain, Partners, d/b/a Arnold & Badgett, Griff R. Dodds, H. L. Townsend, Sr., W. A. Whitsett, P. A. Turner, and Orville F. Rush, Defendants-Appellees. |
| Decision Date | 22 August 1979 |
| Court | Court of Appeals of Tennessee |
William Russell Rice, Jr., Rice & Rice, Jackson, for plaintiffs-appellants.
Sidney W. Spragins, Spragins & Murchison, Jackson, for defendants-appellees, Robert B. Smith, Jr., Robert B. Smith, III, and George A. Smith.
James F. Butler, Goodrick & Butler, Jackson, for defendant-appellee, Billy J. Goodrich.
Jack Manhein, Sr., Jackson, for defendants-appellees, Grady Arnold, W. T. Badgett, R. E. McKenzie and B. G. Spain, d/b/a Arnold & Badgett.
James N. Bryan, Jr., Woods & Woods, A Professional Association, Nashville, and Homer H. Waldrop and David R. Farmer, Waldrop, Hall, Tomlin & Farmer, Jackson, for defendants-appellees, Griff R. Dobbs, P. A. Turner, C. R. Womack, W. A. Whitsett, H. L. Townsend and Orville Rush.
William B. Cain, Cain & Moore, Columbia, for defendant-appellee, Clarence U. Cochran, Jr.
Jerrell H. Parchman, pro se.
These suits arose from the bankruptcy of Peoples Protective Corporation (hereinafter referred to as PPC) subsequent to a sale by PPC to plaintiff Merriman of Peoples Protective Life Insurance Company (hereinafter referred to as PPLIC), a wholly owned subsidiary of PPC.
Plaintiff Merriman is a Kansas City businessman with past experience in purchasing financially unsound insurance businesses, having purchased at least four others prior to this sale.
Plaintiff Continental Bankers Life Insurance Company (hereinafter referred to as CBLIC), one of Merriman's insurance companies, made a loan to PPC, through its agent, plaintiff Merriman, as part of the PPLIC sale.
Defendants Grady Arnold, W. T. Badgett, R. E. McKenzie and B. G. Spain are partners in the accounting firm of Arnold & Badgett which audited certain financial statements prepared by PPC for use in PPC's annual report to its stockholders. These defendants are sued because plaintiffs allege they relied upon the consolidated financial statements prepared by the firm and the information therein was false.
The remaining twelve defendants are alleged to be, both at the time of the occurrences averred and now, directors of PPC and PPLIC. During the course of the proceedings below, they are sometimes referred to as being either inside or outside directors, the former being both officers and directors of the corporation(s) and the latter being solely directors. These defendants are sued for negligent misrepresentation on the theory that they knew or should have known that PPC was on the brink of bankruptcy at the time of the sale. The outside directors are Dodds, Turner, Womack, Whitsett, Townsend, Rush and Parchman.
As evidenced by the eight volumes of technical record and twelve volumes of the bill of exceptions, this litigation was difficult and complex. Therefore, we will omit much of the detail here and organize the events in as simple and concise form as possible.
Plaintiff Merriman and his associate, Mr. Fickes, an actuarial consultant, learned of the poor financial condition of PPC and that its insurance division, PPLIC, might be for sale. The two men flew to Jackson, Tennessee, to investigate the company and obtain financial information. Merriman then prepared an offer to purchase PPLIC from PPC. The offer, by letter of April 17, 1974, was in great detail containing the terms of the sale and a complex formula was used which Merriman had utilized in past purchases. By its terms, the offer expired if not accepted within 24 hours. In response, PPC counteroffered, requiring Merriman to assist PPC in obtaining a $500,000.00 loan with which to purchase the pledged stock of PPLIC. The counteroffer also conditioned the sale of PPLIC upon the PPC Board of Directors' approval.
Merriman agreed to the terms of the counteroffer but was unable to obtain the $500,000.00 loan assistance for PPC. Thus, to consummate the sale, Merriman agreed to loan PPC $153,000.00 (and later an additional $41,500.00 loan was made) and to cause his insurance company, CBLIC, to likewise loan PPC $95,000.00. Merriman his advisor and representatives of PPC then flew to Nashville to obtain approval of the sale from the Tennessee State Department of Banking and Insurance.
On May 1, 1974, the sale of PPLIC was consummated and the stock of PPLIC was transferred to Merriman.
In July of 1974, PPC filed a Chapter XI bankruptcy in the United States District Court at Jackson, Tennessee. The case was subsequently converted to a Chapter III bankruptcy. CBLIC instituted suit on July 11, 1974, and Merriman did likewise on January 14, 1975. The suits were consolidated for trial.
Defendants all filed Motions to Dismiss which were overruled. The consolidated trials began on September 14, 1977 and lasted seven days. When plaintiffs rested their case, defendants moved for dismissal. Plaintiffs were given 30 days within which to file a written response to the motions. They were later given an extension of time. Plaintiffs filed their brief and a Motion to Amend their Complaints to allege the directors' personal financial interest as influencing their decision to sell PPLIC.
On January 30, 1978, the Chancellor filed his Memorandum Opinion dismissing the Complaints and denying the Motion to Amend.
The Chancellor, applying City of Columbia v. C. F. W. Construction Co., 557 S.W.2d 734 (Tenn.1977), found that plaintiffs had failed to establish by a preponderance of the evidence that the defendants supplied false or misleading information to plaintiffs or that plaintiffs relied upon any information received from any of the defendants.
Plaintiffs have filed a lengthy and exhaustive brief on this appeal in which they assign 30 errors in the court below. We find it unnecessary to reproduce the assignments in this opinion. They are divisible basically into two groupings, those that apply to defendants directors and those that apply to the defendants from Arnold & Badgett. Within these subdivisions, the assignments contain clearly defined issues which dispose of the merits of this appeal.
The issues raised by the thirty assignments of error, the portions thereof relating to the directors, are:
1. May the creditors of a corporation, on their own behalf, sue the directors of the corporation on the ground that the latter have failed to properly manage the corporate affairs?
2. Did the Chancellor properly dismiss plaintiffs' complaints on the grounds that plaintiffs failed to establish by a preponderance of the evidence that:
(1) the defendants supplied any false or misleading information to plaintiffs; and,
(2) that plaintiffs relied upon information received from any of the defendants?
The current law in Tennessee, that creditors of a corporation have no right of action against directors for mismanagement was first enunciated in Hume v. Bank, 77 Tenn. (9 Lea) 728 (1882), wherein the court declares that a director, as an agent of the corporation, is liable to the corporation. However, the court noted that a director may become personally liable to a creditor by either (1) statute or (2) "by some conduct which creates a privity of contract between them, or which results in a tortious injury to the creditor for which an action ex delicto will lie." Id. at 747.
The rationale for the Hume proposition rests in the concept of privity, statutory or otherwise. That concept was thoroughly discussed in Deaderick v. Bank, 100 Tenn. 457, 45 S.W. 786 (1897).
There, depositors of the bank filed a bill to hold some of the directors liable for lost deposits occasioned by the sanctioning of loans to insolvent parties resulting in the bank's subsequent insolvency. The bill contained many charges of fraud, gross neglect and willful mismanagement on the part of the directors. The court directed its attention to the directors' liability based on statute, Shannon's Code § 3242, repealed in Chapter 36 § 3 (1969), and the common law.
The court noted:
It is, therefore, the general rule that no action can be maintained by third persons against the agent to recover damages for any injury which they have sustained by reason of the nonperformance or neglect of duty which the agent owes to his principal. 100 Tenn. at 462, 45 S.W. at 788.
The court continued:
That directors are liable in an action at law to their principal, the corporation, for losses resulting to it from their malfeasance, misfeasance, or their failure or neglect to discharge the duties imposed by their office, and in equity, to the stockholders, for these losses, the corporation declining to bring suit, is clear, upon the authorities. Though the corporation is the legal entity, yet the stockholders are interested in the operations of the corporation while in a state of activity, and, upon its dissolution, in the distribution of its...
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