A RK. JOHNSON V. COLEMAN. 1087 JOHNSON V. COLEMAN. Opinion delivered September 23, 1929. CORPORATIONS—LIABILiTY OF DIRECTOR FOR NEGLIGENCE.—Any failure of a director to exercise diligenee or good faith, which results in loss to a stockholder or creditdr, renders such director liable for loss occasioned thereby. 2. CORPORATIONS—NEGLIGENCE OF DIRECTORS—SUFFICIEN CY OF EVI-DEN CE.— Evidence, in a suit by creditors to recover against directors of a corporation, held insufficient to establish that the directors were guilty of negligence or any intentional wrong sufficient to warrant recovery. 3. NEGLIGENCE—DEFINInoN.---Negligence means the failure to ex- ercise ordinary care, or such care as a man of ordinary prudence would exercise under similar circumstances. Appeal from Sebastian 'Chancery Court, Fort Smith District ; J. V. Bourland, 'Chancellor ; reversed on appeal, affirmed on cross-appeal. . Fitzhugh & Brizzolar'a, Pryor, Miles & Pryo-r, - for appellant. Evans & Evans, • Daily & Woods and J. V. Me-Donough, for appellee. MEHAFFY, J. An adtion was instituted in the Sebas-tian Chancery Court by the City National Bank against the appellants, and another suit was instituted in the
1088 JOHNSON V. COLEMAN. [179 same court by 'Charles E. 'Coleman et al. against appellants, and these cases were consolidated for trial, and all of the evidence is contained in one bill of exceptions. Both suits are against appellants as directors of the John A. Guthrie • Mortgage Company, a corporation created under the laws of the State of Arkansas. John A. Guthrie, who was the owner of practically -all the stock in the mortgage company, began business in the city of Fayetteville prior to August, 1924, and began business in Fort Smith some time in August, 1924. Out of the mAss of testimo4 introduced on the trial of these cases appear a few relevant and pertinent bits of evidence, and the testimony establishing them is, for all practicable purposes, without conflict, so much so that we are warranted in assuming that the relevant and pertinent facts may be taken as estalblished, and which may be summarized and stated in a few paragraphs. John A. Guthrie established the business of a farm loan broker with his office in the city of Fayetteville, which he conducted for a time under . the name of the Security Mortgage & Investment Company. Afterward the John A. Guthrie Mortgage Company was formed, with a paid-up 'capital stock, as shown by its articles _.and certificate, of $15,000. Guthrie was the -owner of practically the entire capital stock,. and for all practical purposes was the owner of the corporation. The business of the Security Mortgage & Investment CompanY was taken over by the Guthrie Mortgage ' Company. The affairs of this last-named company seem to have prospered, and Guthrie approached the Merchants' National Bank of the city of Fort Smith for a line of credit, where he was informed that he could not be accommodated, doing business as he was in Fayetteville, but, if he transferred his Office to Fort Smith, his application would have consideration at the. bank. 'Shortly thereafter he did move The office of his company to that city, and brought with him complimentary statements from the banks at Fay-etteville, with whom he had (been doing business. He began
ARK.] JOHNSON V. COLEMAN. 1089 making deposits from time to time with the 'Merchants' Bank, and finally was given a line .of credit of $10,000. -He also secured credit with the . Valley Bank & Trust Company, to what extent is not disclosed, and which .is •unimportant. He did a large volume-of business with the Merchants' National Bank and preshmably with the Valley Bank. He procured a 'handsome suite of -offices fOr his company, engaged a number of employees, and, in a remarkably short space of time, appeared to have established a prosperous and rapidly growing business. W. H. Johnson, acting. vice president of the Merchants! . Bank, and Mr. Branson, president of. the Valley _Bank, were each given $500 worth of "promotion stock," which, they were informed, then had no : value, but which might become of value in the future, and . these gentlemen were induced to become ;. directors of said mortgage , cpmpany. They, evidently took, considerable interest in the success. of the mortgage company, and attended a number of • he :meetings , of its board of_ directors, and gave the company frequent advice as to tbe•conduct of its :ai-lairs. They were gratified to have for their banks the business of this young man, and doubtless hoped that their several institutions would reap considerable profit therefrom. . . His business appeared wholly legitimate, and was conducted in this manner . : He would procure from 'the borrower an application • for . the Joan, Constituting 'his company the agent to procure same, and with the application was given the note, and, to secure it, the mortgage of the borrower. He would deposit the application, note and mortgage in tbe banks, and from them secure the money for the borrower. To repay the 'bank, he was to sell the note and security to Eastern investors. As its profit the company received' a commission from the borrower, in a few instances paid in -Cash, but more frequently by interest-bearing note, to be paid in the future, and secured by mortgage -on . the land, but subject to the mortgage given for the loan: This method of doing business appears to have not been unusual.
1090 jOHNSON v. COLEMAN. [179 After haVing been engaged in this buSinesS _for 'Some _ time at Fort Smith, and after a numiber of leans had been made, it became necessary to realize cash upon the commission notes .for Purposes cif meeting current expens'es and for the expansion of the business. To- accomplish this, the Guthrie Mortgage Company •issued 'a number -of interest "gold bonds," eachior a•stiPulated prineipal sum, with coupons attached, these bonds being secured-by the deposit with -Mr. Branson, trustee, of -a, number of -commission notes secured as aforesaid, in an amOnnt exOess 'of the principal snm _named in the bond. These bonds were in the hands of the .comPany's agents for sale, and a considerable number of bonds were sold •to -various persons. The Guthrie Compau . advertised it basinesS "eXtensively, and gave proininent . mentiol n of • :the fact that 'the aPipellants were members 'Of itS board -of .directors. Its advertisements emphasized the conservative char- • acter . Of its business;the fertility of the soil of the fartas. Seeming the loanS, and the salubritY of the climate, with all 'other matters which would Make its 'securities . attractive to inVestors. . Johnson, Branson and the other appellants kneW of the method used in the conduct of the mortgage' . cOmpany's business with respect -to securing. the money - to be given the ; borrower from the local banks; selling seeuri-ties to inVestors to repay the banks,..and ±he purpOse Of the "gold bend" issue, and how this issue . wa g Ili be secured. A .Mr. Boles told appellant, JohnSon, that he had negotiated a loan for $8,000 on his farm, had only received $3,000, and had learned that Guthrie Company-had obtained as much as $6,000 from an investor,• and, naturally, was much dissatisfied. Mr. Johnson at once took this complaint to Guthrie, who. made an explanation which satisfied Johnson that there was no reason to suspect Guthrie . of any wrongful conduct, .and an arrangement was made by which Boles was immediately
ARK.] JOHNSON V: 'COLEMAN. 1091 paid: $3;000 more, this, with the sum he had previously received; mnking $6,000, the total amount for • Which the security was• sold, and the : remaining $2,000 was paid Boles at'a later date from : the sale of the . bonds of the corn-ThiS appears tO have been the only complaint from any one; borrower or ank one -else, of which Johnson or any of the other appellants were 'apprised from: the beginning. until: the closing of . the mortgage company's business. All -ot its Nasiness With the banks at Fort Smith o'r .elsewhere appears to have been - conducted in a manner highly satisfactory, .and no criticism was heard from:any source : until Within , a7-few -weeks before- the coMpany went out-of buSiness, and long after the -transactiOns , were ,made.out of. which .this litigation arOse. . On or abOnt . the 14th day of July, 1926, circum-sta n i ces were 'broUght to the attention of Mr. Johnson indicating -that- the -finanéial cOndition of the Guthrie Mortgage Coinpank Might not be satisfactOry. He- im-inediately_ sbng-h-t-an-intervieW , With G-uthrie and his as-' soCiates engaged-in the . active management of its affairs, \Vhich at" length discloSed the fact that the mortgage 6onVany 'Was , -AO heaVily ' inVolved* that proceedings in bankinplck : Were 'institnted, resulting in ' the mortgage company being adjudged a bankrupt and the sale of its assets; and alf of , its ereditors . 'received practically nothing: : 'There* then -reniained owing and still unpaid considerable ,Sinns to . the 'Mérehants ' 'National Bank; • Arkan-sas Valley Bank, to Wilmans for merchandise sold 'it, City National Bank, , Coleman, 'and various sums to persons, not parties to • these suits. Appellee, Coleman, becanie the creditor of the mortgage' company under • the following circumstances: He Was, at and 'before 'the time' Ofs , the -.transactiOns 'upon whieh this : suit iS . -based, 'a niortgage - broker in Chieago; engaged q n the 'purchase 'Oflarrn- loan securities 'for investors. , He • first bee-ante -acquainted • ith : John •-A. Guthrie when the latter was doing-business as the Security Mortgage & Investment Conapany; but which :lasted
1092 JOHNSON V. 'COLEMAN. [1:79 on]y a few months and was merged into another company. While Guthrie wa§ in business at Fayetteville, Coleman had• business dealings with him, purchasing mortgages from him, and continued to make such purchases from him after his removal to Fort Smith. There has been no complaint made by him regarding ,any security purchased from Guthrie. At an undisclosed date in the year 1925, Guthrie, in company with one . Leo *Grimes, visited Chicago. Grimes had been farnr. loan examiner for at Oklahoma company, and Coleman was familiar with his name and business, but this was the first time he had actually met either him or Guthrie. At the time of this meeting 'Coleman had on his hands a mimber of farm loan notes, procured from a farm laa.n company that had failed, and which • he was endeavoring to . .collect for the investors, who had purchased them through . him as broker. These were called "orphan loans" by Coleman. Coleman had an agreement with Guthrie about these loans, requesting Guthrie to look after them, and , Guthrie stated 'that he would. These loans that Coleman testified 'about were mortgages that. the Guthrie Company had nothing to do with as to making the loan.- They were loans made by the Collins Investment Company, and sold by his clients, and he was undertaking to collect them for his clients through the Guthrie , Company. He had bought the collections when Guthrie 'was in 'Chicago, and made the arrangements at that time. . The other plaintiffs in the Coleman case are persons whose funds are involved in the mortgages and collections testified about : by Coleman. Coleman began doing business with Guthrie at Fayetteville in 1924, and, when Guthrie moved to Fort Smith; Coleman increased his business with the Guthrie Mortgage' Company, and, until the failure of the company, Coleman did not know of any balance in his favor except the Vaughan loan. 'Coleman authorized Guthrie to make these collections.
ARK.] JOHNSON v; COLEMAN. 1093 • The City National Bank, according to the testimony cif Mr. Nakdimen, president .of the bank, conducted in the same manner as G-uthrie's business with -the other its business with the Guthrie Mortgage Company banks. Guthrie would agree to make a loan ;- that is, he agreed to act as agent for the borrower, and the bor-row6r.would give to him-a note and mortgage authorizing the Guthrie -Mortgage Company to act as a-gent and secure- a -loan. Guthrie would then take this note and mortgage to the -City National -Bank and execute the Moftgage company's note, -borrow money, and pledge the note and mortgage given to him by the borrower as secuf-ity for the payment of the note at the bank. He would then give the bank a:receipt' for the note, and mortgage, which were deposited as security, and the bank would surrender him the note and .security, with the under-- standing:that he would sell it in the East, or wherever he could, and then pay the bank. All of the banks doing-business .with the mortgage company knew this was the manner in which it did business, -and -knew- that it was• acting aS agent for borrowers ; knew that it did not have the money to furnish itself, and did not undertake-to furnish the money. - • The testimony is very -voluminous, arid it wOuld be imPracticable and . woUld Make . this opinion entirely too long to set out . even the substance- of the teStimony. • We have,.lowever, carefully -read- and considered the entire record, -and have-reached the -cmichision that the Uppel-lees did: ncit suffer any loss beCause of the negligence of the appellants. The law governing liability in cases of this sort is well settled by the decisions of this court, and we recently said: "It may therefore be stated as the settled rule in this State . that any failure of a director to exercise diligence or good faith . which results in kiss to a stockholder or creditor entitles . arch .. stockholder or creditor to . require the directois whose negligence has caused the loss
1094 [179 to pay. In other . words, the director whose negligence causes loss is *liable for -such loss to stockholder g and creditors." • Sterrtherg v. Blaine, ante, p. 449, 17 8. W. (2d) 286. • . There is no contention made -in this case that any of • the appellants -are dishonest or that they had any inten-tier,. of doing -wrong, arid WP think it. clearly appears from the testimony in the case that neither of them was guilty of negligence or • any intention-al wrong. Negligence-means the failure to exercise ordinary care; such care as a man-of 'ordinary prudence would exercise under similar circumstances. , '• .• • When the entire testimony is considered, we are of opinion that the . appellants in this case acted as men of: ordinary prudence usually- act under such -circumstances. Mr. Nakdimeri himself -wrote letters recommending Guthrie and his mortgage company, and he knew,.. of 'course, at the . time 'that his bank loaned money to the. mortgage corapanY, that the collateral used was to be sold-to-get the'raoney•tO pay the . loan to the 'bank. In-other wOrds, all of them' knew 'all about the manner in which' the business of the mortgage company was transacted. • It would serve no useful purpose to refer to the tes-tirtriony in detail or to discuss the law at length. The base above referred to and-cases therein cited -announce the' principles of law governing cases of this kind. - From what We have said it -follows that the decree must be reverSed, and the case dismissed, and . the decree on the cross-appeal against the Merchants'. National 13ank is affirmed.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.