Sutton v. Reagan & Gee
| Citation | 405 S.W.2d 828 |
| Decision Date | 18 May 1966 |
| Docket Number | No. 14423,14423 |
| Court | Court of Appeals of Texas. Court of Civil Appeals of Texas |
| Parties | Mary Schwartz SUTTON and C. R. Sutton, Jr., Appellants, v. REAGAN & GEE et al., Appellees. . San Antonio |
Matthews, Nowlin, Macfarlane & Barrett, F . W. Baker, San Antonio, for appellants.
Morriss, Boatwright, Lewis & Davis, San Antonio, for appellees.
This suit was filed by appellees, Reagan & Gee, a partnership composed of Cecil Reagan and Clifford Gee, and Reagan and Gee individually, against Louis M. Schwartz, Mary Schwartz Sutton, C. R. Sutton, Jr., and Charles E. Reed. The four defendants were the officers, directors and shareholders of L. Schwartz Company, a corporation which ceased doing business on April 19, 1960, and which has been declared bankrupt. The claims of appellees grew out of the delivery of mohair to the corporation in April, 1960, a few days before the company closed its doors. After trial to a jury, the district court entered judgment in favor of appellees against all defendants in amounts totaling $16,427.17, and awarded the defendants Mary Schwartz Sutton, C. R. Sutton, Jr., and Charles E Reed, judgment over against Louis M. Schwartz. Only Mary Schwartz Sutton and her husband, C. R. Sutton, Jr., have appealed from this judgment.
The L. Schwartz Company was founded as a sole proprietorship mercantile business in 1878, by the grandfather of Louis Schwartz and Mary Schwartz Sutton. In 1928 the business was incorporated with a stated capital of $225,000.00, subscribed to by twenty-two shareholders. None of the defendants herein owned any stock in the corporation until 1952, when Louis Schwartz and his sister, Mrs. Sutton, acquired, by gift, all of the outstanding stock, with the exception of one share which was held by the person serving as secretary-treasurer of the company.
From 1952 until the company closed its doors on April 19, 1960, Schwartz was president and manager of the corporation, devoting his full time to its affairs. Mrs. Sutton was vice-president but, although she conferred with Schwartz from time to time concerning the business, she spent little time at the company's place of business. From 1952 until February 2, 1960, no formal meeting of the shareholders or of the board of directors was held. Whenever action by the board of directors was required, the problem would be discussed informally. If action in the form of corporate resolution was required, the resolution was prepared by Schwartz and signed by Mrs. Sutton and by the secretary-treasurer. The usual practice was for Schwartz to present the proposed resolution to his sister, Mrs. Sutton, frequently at her home, for her signature, after which the person acting as secretary-treasurer would sign the instrument. No minutes were prepared reflecting these unanimous, albeit informal, actions by the directors.
In 1955 or 1956, Schwartz began speculating in the commodities market, buying commodity futures both in his own name and in the name of the company. In February, 1956, Schwartz, Mrs. Sutton and a Mrs. Cage, who was then secretary-treasurer, signed a resolution authorizing the company to maintain an account with the brokerage firm of Merrill, Lynch, Pierce, Fenner and Beane (now Merrill, Lynch, Pierce, Fenner and Smith) for the purchase and sale of stocks, bonds or securities, commodities or commodity futures. This authorization was never revoked. In addition to his dealings with the Merrill firm, Schwartz dealt in commodity futures on his own account with other brokers. He used corporate funds to cover his losses. The money thus drawn by Schwartz was charged to his account on the books of the corporation.
Every year since 1952 an independent certified public accountant made a 'tax audit' of the corporations' books for the purpose of filing a corporate income tax return. As part of this investigation, the accountant prepared financial statements, copies of which were made available to Mrs. Sutton. Mrs. Sutton noted, in the 1957 financial statement, an entry described as 'loss on commodity futures.' She discussed the matter with Schwartz, who assured her that he would stop such speculation. Subsequent financial statements of the corporation contained no entries showing a profit or loss from dealings in commodity futures, although the evidence conclusively establishes that Schwartz, despite his assurances to Mrs. Sutton, continued his speculation.
Until February 2, 1960, C. R. Sutton, Jr., a physician with a full-time private practice, was neither an officer, director nor shareholder of the corporation and took no part in the management of its affairs. On that date his wife, Mary Schwartz Sutton, transferred nine shares of stock to him, and that evening a shareholders' meeting was held at which Dr. Sutton was named second vice-president, and elected to the board of directors.
Soon after February 2, 1960, Dr. Sutton engaged Woodrow Ede, a certified public accountant, to examine the books and records of the company and to prepare analyses of the company's operations. According to Ede, he was unable to compile any tentative figures he could 'work with' until March 21, 1960. Some time thereafter Ede prepared and furnished to Dr. Sutton a trial balance sheet as of February 29, 1960. This trial balance contained an entry, as an account receivable under the designation 'Merrill, Lynch, Fenner & Smith,' of the sum of $124,175.00. All of this amount apparently represented losses resulting from Schwartz's speculations.
The trial balance showing the condition of the company as of February 29, 1960, showed that the assets of the company exceeded its liabilities by more than $57,000.00. However, this balance sheet contained a note pointing out that the Merrill, Lynch account was being carried as an account receivable 'pending final decision on whether this will be a corporation or individual loss.' At first, Schwartz agreed that he would convey certain property of his to the corporation to secure payment of the amounts owed by him to the corporation. Subsequently, Schwartz reneged on this agreement, and at that time Ede and appellants decided that this account must be carried as a company loss. When the sum of $124,175.00 is deducted from the assets of the corporation, the balance sheet shows that the liabilities of the company exceeded its assets by a substantial sum.
Ede testified that as of March, 1960, Schwartz owed the corporation, on his personal account, the sum of $107,871.00.
After February 2, 1960, Schwartz and Mrs. Sutton each borrowed $60,000.00 by mortgaging ranches owned by them. The $120,000.00 realized from these loans was used for the benefit of the corporation.
Ede testified that he did not determine that the company was insolvent until three or four days before the company closed its doors on April 19, 1960. Until that time, he was of the opinion that it was economically 'possible and probable' to keep the business open, and appellants were doing everything possible to see that the business remained open.
The financial collapse of the company was due not only to Schwartz's disastrous venture into the commodity futures market, but also to heavy losses suffered by the company in its operations relating to the purchase and sale of mohair. All contracts relating to the sale and purchase of mohair were handled exclusively by Schwartz. In March, 1960, Schwartz represented to Ede and to appellants that the great bulk of the mohair which the company was obligated to deliver that spring to buyers under contracts negotiated in the fall of 1959 had already been purchased at prices which would enable the company to realize a profit. In fact, as Ede subsequently discovered, only a minor portion of the mohair required to fulfill the company's obligations had been acquired, and the price which Schwartz had obligated the company to pay for such mohair was in excess of the price at which the company had obligated itself to sell it. Schwartz assured Ede that he would be able to acquire the needed mohair in Arizona and New Mexico at prices which would enable the company to fulfill its contractual obligations at a profit. Ede himself advised appellants that the high price of mohair in March was due to the lateness of the shearing season, and that as soon as the growers completed shearing the price would decline. Contrary to Ede's expectations, there was no decline in the price of mohair. As a result, the company suffered heavy losses .
After the company closed its doors on April 19, 1960, several creditors of the corporation, other than appellees, forced it into involuntary bankruptcy.
Appellees' mohair was delivered to the L. Schwartz Company warehouse on April 2 and April 6, 1960. The jury found that such delivery was on consignment, to be sold by the company on a commission basis for the account of appellees. Appellees' mohair was sold by the company, and it is undisputed that appellees did not receive the full proceeds of such sales.
Appellees alleged that appellants and the other two defendants were individually liable for the conversion of the mohair, or the misappropriation of the proceeds of the sale thereof, for the following reasons:
1. Appellants negligently permitted Schwartz, 'during the last year before' the transactions involving appellees' mohair, to appropriate to his own use more than $100,000.00 of corporate funds.
2. Because of the appropriation of corporate funds by Schwartz, the corporation was, and appellants knew it to be, insolvent at the time of the transactions between appellees and the corporation, and appellants wrongfully concealed such insolvency from appellees.
3. Appellants were negligent in failing to see that the proceeds from the sale of appellees' mohair were faithfully accounted for and paid to appellees.
4. Appellants were negligent in (1) permitting the corporation to engage in ultra vires acts; (2) permitting Schwartz to remain as...
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