Supreme Court

92 DOUGLAS V. THOMPSON. [206 DOUGLAS V. THOMPSON. 4-6826 176 S. W. 2d 717 Opinion delivered April 26, 1943.

1. LIMITATION OF ACTIONS—CLAIMS AGAINST INSOLVENT BANK.— Section 768 of Pope's Digest fixes one year as the time within which demands against an insolvent bank must be filed. Time runs from the date assets are taken over by the state commis-sioner. Held, that when transactions involving liabilities to a drainage district were concealed by the bank's cashier, neces­sitating an audit before the indebtedness could be ascertained, the statute was tolled while information was being compiled, those asserting the claim having acted with due diligence.

2. BANKS AND BANKING.—Action of directors in delegating to a cashier virtual control of the institution, and the act of such cashier in diverting drainage aistrict funds and manipulating records to the damage of taxpayers, rendered the bank liable.

ARK.] DOUGLAS V. THOMPSON. 93 3. TRIAL—DISCRETION OF CHANCELLOR.—Taxpayers in an improve­ment district, claiming that one of three co-receivers was liable

for $32,516.27 by reason of a breach of trust, filed their claim in probate court, contending the deceased receiver's estate was ac-countable. In a suit in chancery by these taxpayers the court

was asked to require the decedent's administratrix to file an ac-count. Held, the court did not abuse its discretion in declining to order settlement while the claim was still pending in the forum

of appellants' original choice.

4. TRIAL—PREPONDERANCE OF TESTIMONY.—Where records testified to by auditor for drainage district showed that a bond broker had conspired with the cashier of a bank (the cashier also being one of three receivers for the district) to "corner the market" on certain securities, and margins were seemingly made, repre­senting the difference between purchase at discount and redemp­tion at par, and such profits were credited on bank records to the accounts of certain individuals, it was not error for the chan­

cellor to find that the evidence did not warrant estates of the individuals to be held for the supposed diversions, there having been no definite proof that the money reached those who, prima facie, were credited. 5. TRIAL—SUFFICIENCY OF EVIDENCE TO SUSTAIN DECREE.—Bragg and Williamson, whose names were signed to receivers' bond, denied they had subscribed the document. Against their declarations was the testimony of a so-called handwriting expert, who claimed to have made certain comparisons. Held, the decree was not con­trary to a preponderance of the evidence.

6. CONTRACTS—COVENANT NOT TO SUE.—While settlement with one of several joint-tortfeasors ordinarily has the effect of discharg­ing the obligation, a different situation arises when payment of a part of the debt is made in consideration of a covenant not to

sue.

7. COURTS—CHANCERY PRACTICE.—The Clean Hands Doctrine is too well established in our jurisprudence to require repetition of maxims or citation to case or text. It emphatically says to de-spoilers that contaminated transactions shall not entice equitable

dispensation. It asserts that he - who knocks at the door of jus­tice may not gain entrance with a password of deception.

Appeal from Crittenden Chancery Court; J. F. Gautney, Chancellor ; affirmed in part and _reversed in part. Harrelson & Harrelson, Mann & McCulloch, . and Norton & Butler, for appellants. Elton A. Rieves, Jr., John A. Fogleman, A. B. Shafer,-Roy Church, and Was Davis, for appellees.

94 DOUGLAS V. THOMPSON. [206 GRIFFIN SMITH, Chief Justice. Tri-County Drainage District, embracing lands in Crittenden, St. Francis, and Cross counties, was formed in 1914. Six percent serial bonds amounting to $400,000 were issued, with maturities September 1 of each year. Interest was payable in March and September, final obligations falling due in 1934. In 1918 a sub-district was created.' Its $45,000 of 51/0% bonds matured over a period of eighteen years, the last falling due September 1, 1935. Commissioners, all residents of Crittenden county, were MT . B. Rhodes, C. MT . Cooper, and Jobn W. Scott. S. H. Jones, claiming to be a bondOwner, made c&- tain allegations in a suit filed in Crittenden Chancery Court, in consequence of which Rhodes, Cooper, and •cott were appointed Receivers October 10, 1932. The Court's direction was that the Receivers executed bond for $50,000. Sureties, prima facie, were Z. T. Bragg and H. C. Williamson.2 In addition to various business interests, including farming on a large scale, Rhodes was cashier of The Bank of Marion. 3 He seems to have been in virtual con­trol of 'the institution and administered its affairs in a personal manner: This bank was designated in the re­ceivership order as depository. The Bank became insol­vent and was taken over by the State Commissioner February 7, 1938, although the deputy commissioner (R. E. Robertson) did not assume his duties until Febru­ary 21. It is alleged in appellants' brief that Rhodes, Scott, and Cooper did not file a report or publish any informa­tion until December 3, 1937—more than two years after the last bond of the sub-district had matured, and more than three years after bonds of the principal district were past-duo. 1 All references to "the District" include the sub-district unless otherwise indicated. 2 The term "prima facie" is used because it is contended, and the Court found, that Bragg and Williamson did not sign the document in question. 3 Early in February, 1938, Rhodes committed suicide. Some time later Scott, also, committed suicide. Appellants allege that Cooper did not actively participate as a Commissioner.

ARK.1 DOUGLAS V. THOMPSON. 95 .In these circumstances—having served as commis­sioners for eighteen years, and as receivers for five years—Rhodes, Scott, and Cooper filed a petition alleg­ing that bonds were outstanding. Prayer was that a six percent levy on tbe assessed betterments be extended for 1938„ Three days later the order was made. Following insolvency of the Bank of Marion and suicide of Rhodes and Scott, C. H. Bond, L. L. Barham, and Luther Wallin were appointed co-receivers. It is contended that landowners did not learn addi­tional assessment had been made until .they began pay­ing taxes in 1938. As a consequence of conferences bad• by those affected, attorneys were employed to determine whether tbe tax should be paid. Failing to find records it had been pres. umed were •kept by the Commissioners, and in the absence of -re-ports by the Receivers, John A. Ellis, a Memphis public • accountant, was employed by landowners to make an audit.4 Ellis began work April 15, 1938. 5 He ascertained that virtually all records pertaining to the District had been kept by Rhodes in his office in the bank building. It is stated In a brief that these records were "among [Rhodes1 private files." There is the further conten-tion, supported by Ellis' testimony, that because of the indiscriminate manner of bookkeeping, there was no way to distinguish between bank records, district records, records of the commissioners, and records pertaining to the receivership, without referring to private records kept by Rhodes. 4 Emphasizing Ellis' ability and proficiency, appellants direct attention to certain facts developed by the testimony : that the ac­countant had practiced his profession twenty years; is a graduate of Millsaps College, and at times had been retained by the City of Mem­phis to audit various bureaus. He had been employed by many cor­porations and by private business concerns. ' 5 Appellants' brief contains this statement: "The Bank of Marion was in liquidation, in charge of R. E. Robertson. . . . A. B. Goodrum of the firm of Russell Brown & Company, of Little Rock, was making an audit of the bank for the State Commissioner under the supervision of Robertson. . . . Robertson and Goodrum co­operated fully with Ellis and permitted him to make an examination of the papers, records, documents, etc., relating to the affairs of the districts."

96 DOUGLAS V. THOMPSON. [206 The audit was completed August 15, 1938: Irregu­larities by Rhodes, in which Scott is alleged to have par­ticipated as beneficary, are many.n Scott owned numerous farms, and also appears to have been engaged in the real estate business. He and Rhodes were associated in agricultural operations. Robertson, as receiver, and A. B. Goodrum, an ac­countant representing Russell Brown & Company in auditing the bank's books, cooperated with Ellis. Due' to the incompleteness of records, and to inconsistencies in bookkeeping, Ellis was not able to definitely determine .the amount of bonds outstanding at any designated period. L. K. Thompson, of Memphis, claimed to own bonds of the par value of $43,000. These were acquired, according to appellants, in aid of a conspiracy with Rhodes, Scott, and others, who are thought to have de­signed a plan for converting the District's misfortune into personal financial gain. When the Ellis audit was filed and Receivers, hav­ing ample time to proceed in the District's interest, failed to act upon information disclosed, A. G. Douglas and others (September . 19, 1938) intervened in the suit un­der which such Receivers were appointed. A8 evidence was taken and facts were developed, additional pleadings were filed. These were in the nature of amendments to the intervention. The sub­stituted Receivers were made defendants. Liability was asserted against the following: (1) The estate of John W. Scott. (2) The estate of W. B. Rhodes. (3) Z. T. Bragg. and H. C. Williamson, sureties. (4) •he estate of Howard Curlin. (5) Bank of Marion. (6) J. C. McCaa. (7) The District's present receivers. (8) C. W. Cooper. (9) Officers of the defunct bank. (10) L. K. Thompson. Service was either had upon all parties., or those not served participated in such manner as to make service unnecessary. Thompson answered. In a counter claim he 6 Appellants' brief contains this reference to Cooper : "Appar-ently he took no interest or active part in the affairs of the district. He was content to let Rhodes and Scott conduct the district in their own unique way. Apparently he did nothing about the district and received nothing in return."

ARK.] DOUGLAS v. THOMPSON. 97 asked for judgment against the District for the bonds he claimed to own. May .6, 1939, J. C. Young was appointed as the Court's Commissioner. His first report was . made Sep­tember 5, 1941. With the exception of a part of the Thompson claim, all issues were found against the in-terveners. The appeal queStions correctness of . the Court's ac-tion: in allowing Thompson to recover $36,293.6.6, and in declining to render judgments (a . ) against the bank for $25,436.56, representing the aggregate sums Rhodes is alleged to have diverted from the District's assets while such funds were on deposit or after they came into Rhodes' hands .as district assets with •the institution Rhodes managed: (b) against the estate of John W. Scott for $32,516.27 ; (c) against Z. T. Bragg and H. C. Williamson, jointly and severally, for $32,516.27; and, (d) against the estate of Howard •urlin for $1,815.71. Appellees moved in this Court to have the appeal dis­missed for failure of -appellants to sufficiently abstract. If such deficiency existed the error was cured by appel-lants' supplemental abstract filed December 21, 1942, with leave. Appellants state in their reply brief tbat after the transcript was filed the administrator of the Rhodes estate, to whom had been presented the claim of $32,- 516.27, agreed with attorneys representing the landown­ers and with Receivers for the District that a payment of $7,500 would be made. The claim had been disallowed by the administrator and was, pending in the probate court. The offer was accepted in consideration of a covenant not to sue. Chancery . approved. It is now con­ceded by appellants that the aggregate of $25,436.56, asserted against the. Bank, should be credited with $7,500, leaving a balance of $17,936.56. Amounts sought to be recovered from the hank are listed in tbe audit under eleven schedules, $22,101.12 having been compiled from debits . against the District evidenced by unauthorized memoranda. Withdrawals by charge tickets bearing no signature amount to $3,042.99. Another iteM is "sheck tO C. R. Head, $292.40."

98 DOUGLAS *V. THOMPSON. [206 The claim of $32,516.27 against the . estate of John W. Scott is a composite of District funds diverted to un­authorized purposes and not accounted for by the Re-ceivers, funds diverted from assets of the District by bond manipulations, withdrawals from District account, and profits made by-receivers on bond purchases. Claims against Bragg and Williamson as sureties are the same as those urged against the Scott estate-$32,516.27. As to the amounts sought to be recovered from- the Curlin estate, deposits are alleged to have been credited to his bank account as: part of the profits realized from bonds purchased at a discount by Rhodes and perhaps others. It is contended that District funds were used and that the bonds were redeemed at par. As an indica­tion of the scope of the litigation, various pleadings and filing dates are shown in the margin.' Original petition for appointment of receivers, October 8, 1932; answer of the District and Commissioners, October 8, 1932; order appointing receivers, October 10, 1932; order appointing receiver in succession for W. B. Rhodes, February 10, 1938; order appointing receiver in succession for John W. Scott, February 24, 1938; appoint­ment of Luther Wallin as co-receiver, March 18, 1938; intervention of A. G. Douglas and other landowners of the District, September 19, 1938; order on intervention, September 19, 1938; entry of appearance of L. K. Thompson, October 21, 1938; Thompson's answer and counter-claim, December 15, 1938; State Bank Commissioner's answer to in-tervention, December 15, 1938; response of receivers to intervention, December 20, 1938; receivers' answer to intervention, February 13, 1939; response of interveners to counterclaim of L. K. Thompson, February 17, 1939; amendment to answer bank commissioner, Febru­ary 17, 1939; motion of L. K. Thompson to require receivers to pay interest on bonds, February 17, 1939; amendments to intervention. February 17 and March 13, 1939; C. W. Cooper's answer to interven-tion, March 20, 1939; separate answer of bank commissioner_ to amendment to intervention, April 25, 1939; separate demurrer of J. F. Rieves, Sanders Danner, S. H. Jones, April 25 and May 16, 1939; answer of C. H. Bond, Luther Wallin, and L. L. Barham, April 25, 1939; answer of J. A. McCaa and Howard Curlin, April 25, 1939; order appointing commissioner in chancery, May 6, 1939; separate answer of Bank of Marion and bank commissioner, May 16, 1939; answer of Z. T. Bragg and H. C. Williamson, June 16, 1939; amend­ment to intervention, July 3, 1939; petition of interveners for order for examination ol signatures of Bragg and Williamson, November 17, 1939; -motion to quash interveners' depositions, December 12, 1939; receivers' motion to dismiss, December 12, 1939; motion of bank commissioner and others to dismiss, March 18, 1940; objections by defendants to testimony taken by interveners, May 16, 1940; petition of receivers to require interveners to file bond, June 24, 1940; mo­tion of interveners to revive as to C. W. Cooper, September 9, 1940; answer to amendment to intervention by receivers, September 26, 1940; motion of interveners for rule on court reporter, March 1,

ARK.] DOUGLAS V. THOMPSON. 99 In response• to the Jones petition, answer was filed by Rhodes, Cooper, and Scott, as commissioners, in which it was asserted that all bonds maturing prior to 1931 had been paid. It was then alleged that $24,000 of $32,000 maturing September 1, 1931, had been paid, leaving $8,000 delinquent ; that $34,000 woUld mature September 1, 1932, $36,000 September 1, 1933, and $31,000 Septem­ber 1, 1934-a total of $109,000. Between October 10, 1932, and a date not designated, the Receivers are alleged to- have collected, and disbursed $134,905.83,. ". . . this being approximately $25,000 more than the total bonds reported outstanding when Receivers were appointed." There was the cumulative contention that no improvements had been made, no maintenance costs had- been, incurred, and that the Re­ceivers served without authorized pay. Despite -what, in effect, the interveners pointed to as inconsistencies, the Receivers reported that on December 3, 1937, $43,000 of bonds, 'exclusive of interest, were outstanding. There was reference to the Court's order of March 31, 1938, in which it was recited that Thompson was the_ owner of bonds equal in amount to .obligations referred to by the Receivers.8 Listed in assets of the defunct Bank were $8,000 of Tri-County bonds maturing September' 1, 1934, and $7,000 a the sub-district's bonds, four of which matured 1941; stipulation of parties for separate submission of issues, August 15, 1941; receivers' petition on Thompson issue, September 5, 1941; report of commissioner, September 5, 1941; amendment to commis-sioner's report, September 18, 1941; petition of interveners for cita-tion, October 14, 1941; response, October 16, 1941; order on peti­tion for citation, October 20, 1941; report of commissioner, October 20, 1941; interveners' exceptions to report of commissioner, October 20, 1941; additional exceptions of interveners to commissioner's report, October 20, 1941; exceptions of L. K. Thompson.to report of the com-missioner, October 20, 1941; decree, October 20, 1941. 8 By consent the order of December 6, 1937, was modified, the effect of which was to authorize 40 percent of the levy extended against 1938 benefits to be paid that year and 60 percent to be paid during 1939 and 1940. Aggregate assessments were $45,917.34. , [A comment by the Auditor is: "It is noted that L. K. Thompson signed a receipt dated December 22, 1937, for $7,504, including the payment of $4,000 for four bonds. However, the petition of December 3, 1937, and the order of March 31, 1938, between which dates the $4,000 was receipted for by Thompson, both recite that bonds in the amount of $43,000 were outstanding."]

100 DOUGLAS V. THOMPSON. [206 September 1, 1935. The remaining three matured a year later. The eight $1,000 bonds of the principal district were carried on the Bank's books at $4,800, while the seven $1,000 sub-district bonds were carried at $4,200. A court order of April 1, 1938, recites that the Bank Com­missioner 's investigations disclosed payment of the bonds ; hence, if there should be recovery, said the Com- • missioner, ". . . it would be necessary to proceed against those responsible for the act of setting into the assets of said Bank bonds that have been paid." The Court authorized the District and sub-district to be credited and the bonds to be charged to "other re-sources." 9

An allegation by the interveners was that all bonds had been paid, and that if Thompson bad possession of the so-called securities, he was not a bolder for value without notice, but obtained them through gross fraud in. collusion with Rhodes and others who occupied fiduciary relationships to the District... The deceit alleged to have been consummated by Rhodes consisted in handling the fraudulently-procured bonds. In some instances purchases .were made through the Bank's account. These transactions, while ostensibly for the benefit of the Bank, were so effectively disguised that it was difficult to trace essential Movements which originated in the fraudulent impulse, and to follow them at every turn until the purpose to loot the District's treasury had been consummated; yet, entries actually made on -the Bank's books, and temporary disappear­ance of assets that usually reappeared when bonds pur­chased at a discount could be paid, were, with other facts and circumstances, evidence which pointed to manipula­tion of accounts, the withholding of credits, and a divi­sion of profits—in short, violatimi of the trust imposed by law and good conscience. The Court's Commissioner found that Thompson acted collusively with -Rhodes in regard to the $43,000 of 9 In addition to the fifteen $1,000 Tri-County bonds carried by the Bank at $9,000, there were ten $500 bonds and two $100 bonds of Drainage- District No. 7. Although par value of these bonds was $5,200,.they were carried at $4,680; par value of all bonds was $20,200, carried by the Bank at $13,680.

■ ARK.] DOUGLAS V. THOMPSON. 101 bonds, but recommended that the procur6r of these se­curities be allowed their principal cost of $25,183.39. Interest was $11,110.27, making a total of $36,293.66. All other claims were disallowed. The Court adopted and confirmed -the Commissioner's findings. Specifically, appellants charged that in some in­stances bonds were bought at a discount with District funds, and when paid-at par, profits (ordinarily) were divided between Rhodes, Scott, and Thompson. There is the more serious accusation that bonds would be paid, no record of serial numbers or maturity dates retained, and then tbe certificates would reappear in the hands of these sinister speculators; only to be sold again and charged to the District. That Rhodes (or some one for whose acts he was responsible) practiced duplicity of this kind is evi­denced by tbe Bank Commissioner's voluntary state­ment that Tri-County and District No. 7 bonds of the par value of $20,200 were among the Bank's assets, al­though investigation disclosed that they had been paid. When, therefore, tbe District's Commissioners, in their response of October 8, 1932, informed the Court that bonds aggregating only• $109,000 were unpaid, and sub­sequently net collections as designated were made, and it - was still contended there was a bond debt of $43,000, and when a six percent assessment against benefits of $908,- 805.59 was asked—quite naturally, say appellants, they were concerned with an administration which either grossly understated the District's obligation, or fraudu­lently concealed application of taxpayer money. • A defense by Thompson is a letter he wrote to Rhodes January 17, 1935. There is a reference to bonds of District No.-2. Thompson said : "I have changed this contract as per your suggestion to cover Drainage Dis­tricts 3, 6, 7, and 8. I am leaving out Tri-County at your request, and No. 5, because practically all of these bonds are held by myself or one of my friends." Rhodes was requested to check the agreement and, if he approved, to sign one copy and return for completed execution. The document (found by Ellis) was dated January 28,

102 DOUGLAS V. THOMPSON. [206 1935. A provision is that each party should discourage all litigation relating to the districts, "save only such as is necessary to insure the collection of installments of benefits." There was this further statement : " [Neither party] shall engage in the purchase of any bonds of either of the above drainage districts except under this agreement, and all bonds purchased by either party after January 1, 1935, shall be held by the joint account. Profits arising from these transactions shall be equally divided, . . . and neither party shall be required to look into the disposition of the other part of the one-half paid to such party." Notwithstanding answer of the District CoMmission­ers in October, 1932, showing outstanding bonds to be $109,000, the Ellis audit discloses that $18,000 of sub-dis-trict bonds were unpaid. He says that "apparently" the Commissioners ignored this fact. Of course, if $109,000 in bonds of the principal district were outstanding, and $18,000 of the sub-district were unredeemed, it results that the. debt, eiclusive of interest, was $127,000. But this conclusion would not necessarily follow from what Ellis says if in the item of $109,000 established by the Commissioners, sub-district bonds were inCluded, or if other facts to be hereafter discussed affected the trans action. There does not seem to be substantial proof questioning accuracy of Ellis ' testimony that against this fixed liability cash collected and bonds accepted in payment of taxes amounted to $156,309.90.'0 Ellis refers to a report made March 31; 1932, by C. R. Head; It showed payments of $319,000, leaving a' bal-. ance of $126,000 of $445,000. • A circumstance to consider is that the District Com-missioners' answer. to the Jones complaint, in listing the 10 "Net" collections appear to have been arrived at by taking the gross ($156,569.10) and deducting certain so-called "offsetting" items. The deductions are not explained in detail, but seemingly were substracted alike from gross receipts and gross disbursements. For example, at page eighteen of the audit where $156,569.10 ap-pears, receipts include $13,604.05 classified as offsets, while a sched­ule of disbursements on page sixty-three reflects equal totals under a subheading "Restored Charges." Subtracting $13,604.05 from $156,- 569.10 leaves net receipts of $142,965.05.