Estes v. German National Bank

34 S.W. 85, 62 Ark. 7, 1896 Ark. LEXIS 134

• Court: Supreme Court of Arkansas
• Decided: February 8, 1896
• Status: Published

Opinion

Battle, J.

The German National Bank brought this action against the Emonson Mercantile & Manufacturing Company, G. M. Echlin, %. N. Estes & Co., and other creditors of the Emonson Company, to foreclose a lien on certain lands lying in Prairie county, in this state. The pleadings in the case present the following state of facts:

1. In behalf of plaintiff, it was alleged that the Emonson Company, being the owner of the lands before mentioned, sold them in good faith to G. M. Echlin, for the consideration of $21,200, and conveyed them to him by a deed duly executed, acknowledged and recorded ; that Echlin executed to the company seven notes for the purchase money, payable respectively at two, three, four, five, six, seven and eight years after date, which were described in the deed.

2. That these notes were transferred by the Edmonson Company to the bank as collateral security for a large sum of money loaned, before maturity, for a valuable consideration, and “without any notice whatever of any irregularity, illegality or fraud in reference thereto by anyone;” and that of the sum loaned and secured, as stated, $11,400 was due by the company to to the bank at the commencement of the suit.

In behalf of %. N. Edstes & Co., they being the only defendants who answered, it was alleged :

“ 1. That on the 6th of January, 1891, they began a suit in the circuit court against the Edmonson Company to recover a debt of $6,547.88, and sued out an order of attachment that was on that day levied on the lands in controversy ; that they recovered judgment for the amount sued for on the 25th of July, 1891, and the court sustained the attachment, and ordered the lands to be sold to satisfy the same, which remains unpaid and in full force.

“2. That the Edmonson Company was a corporation created by the laws of Arkansas ; that its officers were a president, vice-president, secretary and treasurer, and that it had a corporate seal; that the deed set up in the complaint was made by A. Edmonson, the president of the company, without consultation with his co-directors, without any meeting of the directors, and without any authority from them ; that the deed was wholly unauthorized by the company ; and that in executing it Edmonson was acting in his individual capacity solely, there never having been any meeting of the directors for the purpose of considering the matter of the sale of the lands, or at which the same was considered ; that the transaction was wholly unknown to the stockholders of the corporation ; that the minutes and records of the board of directors fail to show that any action was ever taken concerning this pretended sale and conveyance ; and that the appellee acquired no title thereby.

“3. That G. M. Echlin never took possession of the lands, and never exercised any control over them ; that, after the said pretended sale, the Emonson Company continued irf possession of them, paid taxes on them up to the time that they were attached by the appellants, and continued to receive the rents and profits thereof, which facts were notorious, and were known to the appellee, or would have been learned if proper inquiry had been made.

“4. That the pretended deed to G. M. Echlin was made long after its date ; that it was executed solely for the purpose of using the notes mentioned in the complaint as collateral security for a loan from appellee, and that, after it was executed, it was deposited in a private drawer of A. Emonson in the safe of the Emonson Company, and was never delivered to G. M. Echlin, who was not aware of its existence ; that the deed was filed for record without the authority of the grantee; that it was not filed until after the attachment of appellants was sued out, when the appellee procured its filing by Emonson, the appellee being then aware of these facts.

“5. That in the meantime, before the filing of the deed, and in ignorance of it, the appellants, on the faith that the Emonson Company owned the lands, extended credit to it, and permitted it to contract the debt for which they recovered judgment.”

The facts, as we find them, are substantially as follows : The Emonson Company was a corporation, formed and organized under the laws of the state of Arkansas. Its stockholders were A. Emonson, who owned more than one-half of the stock subscribed, G. M. Echlin, Caroline Shipness, W. C. Shipness, and W. J. Johnson. A. Emonson, P. W. Echlin, and G. M. Echlin were its board of directors. A. Emonson was its president, G. M. Echlin, vice-president, and P. W. Echlin was its secretary and treasurer, and Carlisle, in Prairie county, Arkansas, was its place of business.

The purposes of the corporation, as stated in its articles of association, were as follows : “The company shall be, and is hereby, authorized to do a general mercantile and manufacturing business in all its branches, making and manufacturing hay, ginning and pressing cotton, operating flour and grist mills, establishing and operating oil mill and saw mill, making and manufacturing staves, barrels and farming implements, buying and selling real estate, owning and operating . farms, raising, buying and selling live stock, running a banking and brokerage business, publishing a newspaper, and running a job office.”

The duties and authority of the president of the company were defined by the articles of association as follows: “ The president shall preside at all meetings of the board of directors, and be recognized as the superior officer of the company, and shall give such attention to its affairs as may be necessary for its success. He may borrow money for and in the name of the company, shall sign all checks and drafts, execute papers, and endorse notes for and in the name of the company; shall, in connection with the secretary and treasurer, sign all certificates of stock, and such other documents as may be necessary or required by t^ board of directors; shall have general management, supervision, and control of the employees ;■ have charge of all credits, purchases, sales, freight rates and commission sales ; shall conduct all the correspondence, and perform all other duties not otherwise provided for in these articles.”

The president being vested with extensive authority, and the board of directors being composed of only three members, — the president, vice-president, and secretary (who was also treasurer), — the management of the business of the company was left largely to the president and secretary. The board usually met only once a year, and then to elect officers, and to investigate any business which it deemed proper, and always adjourned subject to the call of the president. They never had any meeting of the board to authorize the president and secretary to borrow money, and yet the president borrowed money. They sold land, but never had a meeting of the board in relation to the same.

In the course of ts business the company acquired a large area of lands, among which was the land in controversy. On the second day of January, 1888, the lands which are the subject of this litigation were sold to G. M. Echlin, at and for the price and sum of $21,200, for which he executed to the company his seven promissory notes, payable, respectively, to the order of the company, two, three, four, five, six, seven and eight years after date; and stated in each one that it was given in part payment for the lands, describing them. P. W. Echlin, secretary and treasurer, and a member of the board of directors, prepared the deed for the conveyance of the lands by the company to G. M. Echlin. The notes, which were described, were stated to be the consideration of the deed, which was signed as follows : “Emonson Mercantile & Manufacturing Company. (^. S.) A. Emonson, President. P. W. Echlin, Secretary.”

On the 17th of January, 1888, A. Emonson, as president, and P. W. Echlin, as secretary, of the company, appeared before a notary public, and stated that they had executed the deed for the consideration and purposes therein mentioned and set forth, and he so certified in a certificate annexed to the deed. There was no meeting of the president and directors to authorise the conveyance of the lands, or to authorize the officers of the company to mortgage real estate to secure the payment of borrowed money.

Most of the land in controversy was fenced for hay purposes. It produced annually from 500 to 700 tons of hay, which sold from $5 to $8 per ton. The company cut this hay after it sold the land to G. M. Echlin, and never allowed any credit for it on his notes, and he never asked any compensation, and paid the taxes on the land, and never charged him for them.

On the 17th of January, 1888, fifteen days after the sale and conveyance to Echlin, the- Emonson Company being indebted to the German Natitínal Bank, and, desiring to borrow money, pledged to it the notes of Echlin to secure the company’s present and future indebtedness to the bank, — which notes were received in good faith, without any notice that the sale and conveyance of the lands were in any way irregular, illegal, or fraudulent. Upon this security, the bank continued to advance money to the company until its indebtedness to the bank at the commencement of this action amounted to $11,400, which, with the Echlin notes, remains wholly unpaid.

About three years after the execution of the deed to Echlin, in a conversation about the payment of the notes given for the land in controversy, the cashier of the bank asked the president of the company if the deed was recorded, and he replied that he did not remember, but would find out when he returned home, and, if it was not, he would either have it recorded or send it to the cashier. The presumption is, the president returned to Carlisle, the place of his company’s business and of the residence of G. M. Echlin ; for in a few days he sent the deed to the cashier of the bank, who, finding that it had not been recorded, filed it for record on the 9th of January, 1891.

¿'resumption as to delivery of deed. Power oí corporate officers to -execute deed.

There is no controversy about the judgment recovered by Estes & Co., or the validity of the attachment in their favor, which was sustained by the court.

The circuit court decreed that the notes executed by G. M. Echlin were a lien on the lands, that it be foreclosed by a sale of the lands, and that the proceeds be applied to the payment of the debt due to the German Bank, and, if there was any residue, that it be applied to the payment of the company’s indebtedness to Estes & Co.; and they appealed.

Appellants insist that this decree should be reversed, for the reason, among others, there was no legal sale of the lands to Echlin. They contend that the deed was never delivered to the grantee. In disproof of this contention, the certificate of the acknowledgment of the deed shows that the president and secretary of the Emonson Company appeared before a notary public, and stated that they had executed it for the consideration and purposes therein mentioned and set forth. The deed having been recorded, this is at least prima facie evidence of its delivery. (Sandels & Hill’s Dig. sec. 721; Jacoway v. Gault, 20 Ark. 190; Wilson v. Spring, 38 Ark. 181; Meyer v. Gossett, Ib. 377). But it is said that the deed was in possession of the company, and was delivered by it to the bank. But that fact does not show that the deed had not been delivered to Echlin. When or how the president of the company got possession of it is not shown. He could have received it from Echlin on his return home, after he promised to ascertain whether it was recorded.

Another reason advanced by appellants for their contention is there was no meeting of the directors or stockholders of the company to authorize the sale of the land or the making of the deed. This is true. But the articles of association show that one of the purposes of the incorporation of the company was to buy and sell real estate ; and that the president was thereby authorized to borrow money for and in the name of the company, to sign all checks and drafts, to execute papers, and indorse notes for and in the name of the company; and that he had charge of all purchases and sales. In connection with this, the evidence shows that the management of the business of the company was largely left to the president and secretary ; that the board' of directors usually met only once a year, and always adjourned subject to the call of the president; that the president borrowed money without a meeting of the board to give him the authority; and that land was sold without convening the directors to authorize the sale. From this course of conduct, it seems that the president, who owned a majority of the stock subscribed, and the secretary, had the entire management and control of the business of the company, and that no meeting of the directors was thought necessary to confer authority on them, except when the president saw fit to call the board together, which was seldom done. Upon these facts and this evidence, the question presented by the contention of appellants should be considered.

In Simon v. Sevier Association, 54 Ark. 58, the rule which controls corporations like the Emonson Company, and the reason for it, are stated as follows: “The act * * provides that the stock, property, affairs, and business of siich corporations shall be under the care of, and shall be managed by, not less than three directors, and that a majority of the directors, convened according to its by-laws, shall constitute a quorum for the transaction of business. Such directors constitute a board, and, in the management of the property, affairs, and business of their corporations, can only act as a board. They have no authority to act save when convened in a board meeting: The separate, individual action of each' director is not the action of ' the corporation. Less tha,n all do. not, under the statute, constitute a quorum for the transaction of business, unless they are legally convened. No director is required to attend a meeting of directors held without authority. Bvery one of them is entitled to vote and be heard in all the proceedings of the board. The shareholders in the corporation are entitled to the influence and advice, of every director in the management of their affairs. Hence, in order to accomplish the object for which each director was elected, a mere majority of the directors cannot constitute a majority of the board for the transaction of business, unless they meet according to, and by authqrity of, the by-laws or rules of the corporation, or are called together upon due and legal notice given to all of them.”

The object of this rule is the benefit and protection of the share-holders of the corporation. The duties of the board are imposed upon more tha.n one member, in order that they may be discharged with that wisdom derived from a conference, discussion, and a comparing of views upon business affairs ; and for this- purpose they are required to meet and take counsel of eachiother. As all this, is for the benefit of the shareholders, who constitute the corporation, they may waive the necessity of the meeting of the board for the transaction of business within their corporate powers. They can do so by permitting the directors to establish a habit or usage of assenting separately to the making and performance of contracts by their agents. By permitting such usages or habits to be formed by a long course of business, they adopt and become bound by them, so long as they acquit esce. If this were not so, great injustice might be done to parties contracting with them in their usual way. “Hence there follows a necessity of giving effect to acts of such corporations, according to the mode in which they allow them to be transacted. If this were not done, it would become impossible to dispose of such contracts with any hope of reaching the truth and justice of the rights and duties of the several parties involved. And this is certainly nothing of which the corporation can complain. It is merely holding them to such rules of action as they see fit to adopt for their own guidance and the transaction of their business.” Bank of Middlebury v. Rutland & W. R. Co., 30 Vt. 158, 170; 3 Thompson, Corporations, sec. 3938, and cases cited.

In this case, the president and secretary of the Fmonson Company, constituting a majority of the directors, were intrusted with the management and transaction of the business of the corporation, a part of which was the purchase and sale of land. For several years the company continued in existence. In that time, as before stated, the board usually met once a year, and then chiefly for the purpose of electing officers. The inference from this and the other evidence in the case is, the directors adopted the practice of assenting separately to the making and execution of contracts by their agents, and the corporators ratified it by long acquiescence. After the corporation had been in existence for more than four years, and continued this practice, presumably, for that length of time, it sold the land in controversy' to G. M. Fchlin, two of the board assenting, and the other purchasing. After this, the president, in the exercise of the power vested in him by the articles of association, borrowed money, for and in the name of the company, from the German National Bank, by depositing notes given for this purchase as collateral security. Believing that the notes were secured by liens on the lands sold, the bank advanced large sums of money to the company, in good faith, and without any notice of any infirmity in their security. The company has never repaid the money, but, on the contrary, was indebted therefor at the commencement of this action in the sum of $11,400. Under these circumstances, the sale of the land was valid as to the bank, and the lien for the purchase money passed with the notes as collateral security; and the action of the company, and the nouaction of Fchlin, in reference to the land after the trans-r fer of the notes, did not affect the lien held by the bank.

Esectof !andSpurchase

The other questions discussed by counsel in their briefs have heretofore been decided by this court in reported cases.

Decree affirmed.