Mims v. Valley Nat. Bank

• Decision Date: 15 March 1971
• Docket Number: No. 1,CA-CIV,1
• Citation: 14 Ariz.App. 190,481 P.2d 876
• Parties: Ethel Louise MIMS, Individually and as next friend of Wanda Louise Mims, Mona Lynne Mims, and Jeffrey Ross Mims, Appellants, v. VALLEY NATIONAL BANK, a national banking association, Appellee. 1034.
• Court: Arizona Court of Appeals

Page 876

481 P.2d 876

14 Ariz.App. 190

Ethel Louise MIMS, Individually and as next friend of Wanda Louise Mims, Mona Lynne Mims, and Jeffrey Ross Mims, Appellants, v. VALLEY NATIONAL BANK, a national banking association, Appellee.

No. 1 CA-CIV 1034.

Court of Appeals of Arizona, Division 1, Department A.

March 15, 1971.

Rehearing Denied April 22, 1971.

Lewis & Roca, by John P. Frank, Peter D. Baird, and Gerald K. Smith, Phoenix, for appellants.

Snell & Wilmer, by Mark Wilmer, Phoenix, for appellee.

RIDGE, Judge of the Superior Court.

Plaintiffs, beneficiaries of a testamentary trust, sued defendant, the executor and testamentary trustee for breach of fiduciary duty and loss of trust assets. Defendant moved for summary judgment on grounds hereinafter described, and defendant was granted summary judgment. This is an appeal from the order of the Maricopa County Superior Court granting defendant's motion for summary judgment. Appellants are the plaintiffs Ethel Louise Mims, individually and as next friend of her three minor children, Wanda Louise Mims, Mona Lynne Mims, and Jeffrey Ross Mims. The defendant-appellee is the Valley National Bank.

The complaint filed on June 24, 1965 alleges that the Last Will and Testament of Atticus Hugo Mims, established a testamentary trust, the beneficiaries of which were appellants, and the designated executor and testamentary trustee was the Valley National Bank (hereinafter referred to as Bank); that the assets of said trust estate included shares of stock which constituted a majority interest in two corporations, namely, Sportswear Mfg. Co. and Thunderbird Fashions, Inc. (hereinafter called selling corporations); that the assets of said corporations were, after the commencement of probate proceedings, sold to Thunderbird Manufacturing, Inc. (hereinafter called purchasing corporation); that the estate sustained great losses during the Bank's executorship and trusteeship, and that the Bank is responsible to appellants for these losses by reason of certain alleged acts of malfeasance and nonfeasance on the part of the Bank in its fiduciary capacity as executor and trustee. The Bank's answer and its arguments in support of summary judgment allege that it was discharged from any liability by reason of court orders which approved and settled the Bank's accounts both as executor and trustee, and further allege that all of the complaints of appellants stem from action or lack of action by the board of directors of the two selling corporations rather than from any conduct of the Bank.

The pertinent chronology, commencing with the death of the testator on May 7, 1958, is that the Bank, having been named as executor, took possession of the estate assets on June 27, 1958; then in the fall of 1958, the selling corporations sold their assets to the purchasing corporation, the sale contract being approved by shareholder action which included the Bank's vote of approval in its capacity of executor as holder of the majority of stock in both selling corporations. Thereafter, during the Bank's executorship (amended decree of final distribution was entered on May 22, 1961, and the Bank was finally discharged as executor on November 29, 1961) the purchasing corporation encountered progressively worsening financial difficulties culminating in a petition for bankruptcy on August 16, 1962 (during the Bank's trusteeship). The entire loss claimed by appellants was sustained prior to the Superior Court order approving the Bank's Third Annual Amended Account on September 30, 1964. The judicial administration of the estate, that is the probate proceedings and the administration of the testamentary trust, were conducted in the Yavapai County Superior Court.

The facts upon which appellants rely to support their claims against the Bank are set forth below: (The record before the trial court on defendant's motion for summary judgment includes these items, which must be taken as true for the purposes of determining defendant's motion and this appeal. Cavanagh v. Kelly, 80 Ariz. 361, 297 P.2d 1102 (1956); Harbour v. Reliable Insurance Company, 94 Ariz. 344, 385 P.2d 220 (1963))

(a) The purchasing corporation agreed to pay $99,071.21 to the selling corporations in monthly installments, and this purchase price was guaranteed individually by the officers of the purchasing corporation, and the purchasing corporation pledged its stock to the selling corporations.

(b) Between March, 1959 and October, 1960, the Bank, in its capacity as a lending institution, made several loans to the purchasing corporation. These consisted of two $5,000.00 loans, represented by promissory notes, and a revolving line of credit in the amount of $50,000.00. These loans were made at a time when the purchasing corporation owed large amounts of money to the selling corporations. The revolving line of credit was secured by an assignment of the purchasing corporation's accounts receivable, and all of the loans were secured by the personal guarantees of the same persons who had guaranteed the obligations due and owing to the selling corporations.

(c) In April, 1961 when the financial distress of the purchasing corporation was known to the Bank, the Bank approved a two-year moratorium on all payments of principal due to the selling corporations under the sales agreement. No moratorium was granted on the amounts owed to the Bank from the outstanding loans. (d) Within a few months after the execution of the sales agreement, the Bank participated in the approval of substantial salary increases for two officers of the purchasing corporation.

(e) Though permitted by the sales contract to place a member on the purchasing corporation's board of directors, the selling corporations and/or the Bank never exercised this right.

(f) Appellants, while relying on the Bank for information as to the status of the purchasing corporation, were either (1) not fully and accurately informed, or (2) were intentionally or unintentionally misled as to the purchasing corporation's condition.

(g) The Bank did not initiate any action to have the two selling corporations exercise their contractual right to terminate the contract and reacquire their assets. The Bank may have failed to cause the selling corporations to vote the pledged stock of the purchasing corporation in accordance with the agreement's terms (if the purchasing corporation's net assets fell below $75,000.00, the selling corporations were then entitled to vote the pledged stock of the purchasing corporation).

While the Bank disagrees with some of these allegations on a factual basis, it mainly relies on two arguments which are claimed to obviate the necessity of any fact determination of the truthfulness of these allegations. The Bank argues that it did not have, as a matter of law, control of the two selling corporations and therefore is not responsible to appellants for any losses which they may have sustained. Ordinarily, the board of directors of a corporation represent the corporate body and is entrusted with authority to conduct the corporate business and manage the corporate affairs. 18 Am.Jur.2d Corporations, § 484. However, this general legal principle does not eliminate the possibility of actual control by another, as for example, a majority shareholder. It must be recognized that a majority shareholder not only has the ability but the right to manage and control a corporation. 13 Fletcher, Cyclopedia Corporations 2d § 5783 (1961), and Gidwitz v. Lanzit Corrugated Box Co., 20 Ill.2d 208, 170 N.E.2d 131 (1960).

Further, it appears that such control may result in the creation of a fiduciary responsibility. Steinfeld v. Nielsen, 12 Ariz. 381, 100 P. 1094 (1909). The Arizona Territorial Supreme Court in that case declared that:

'Steinfeld (i.e., the majority stockholder) was neither an officer nor director of the corporation, yet, as found by the court, he dominated and controlled its affairs through the board of directors. Although we are not cited to any authority in point, we have no hesitation in holding that Steinfeld, because of his power over the board of directors and the affairs of the company, and the domination which the findings show he actually exerted over the corporation, sustained such a relation to the company, and to the stockholders of the company, as does an officer or director having such management and control, and that therefore he occupied such a fiduciary relation to the company and to the stockholders of the company as he would have sustained had he been such officer or director.' 12 Ariz. at 402, 100 P. at 1101, 1102.

The Territorial Supreme Court was reversed on procedural grounds by the United States Supreme Court, 224 U.S. 534, 32 S.Ct. 609, 56 L.Ed. 872 (1912). Thereafter the Supreme Court of the State of Arizona in Steinfeld v. Nielsen, 15 Ariz. 424, 139 P. 879 (1914), satisfied the procedural requirements. The Arizona Supreme Court in that case found that the majority stockholder's domination of a mining company was absolute and stated:

'Possessing such unlimited power over the mining company, he ought to be held to owe the same standard of conduct towards the stockholders of the company as is due from an officer or director.' 15 Ariz. at 444, 139 P. at 887.

We adopt the above-quoted statement from the Territorial Supreme Court's opinion as being a correct statement of the law. See also Garrett v. Reid-Cashion Land and Cattle Co., 34 Ariz. 245, 270 P. 1044 (1928).

In this case we believe the record raises a factual issue as to whether the Bank had actual control over the selling corporations, and thus the claimed absence of control...