Arkansas Iron & Metal Co. v. First National Bank of Rogers

Citations: 701 S.W.2d 380; 16 Ark. App. 245; 1985 Ark. App. LEXIS 2226Docket: CA 85-103

Court: Court of Appeals of Arkansas; December 11, 1985; Arkansas; State Appellate Court

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The Court of Appeals of Arkansas affirmed a judgment against Arkansas Iron and Metal Company and Wilma F. Yaffee, ordering them to pay $538,301.84 plus interest and costs, with an in rem foreclosure judgment against Wybash Corporation. The appellants raised three primary arguments for reversal: the denial of a continuance, the failure to direct a verdict in favor of Wybash Corporation, and the failure to direct a verdict for Arkansas Iron and Metal Company and Yaffee. The case arose from a complaint filed by First National Bank of Rogers, which sought a receiver due to claims of significant impairment of its collateral. Yaffee, who owned 100% of Arkansas Iron and Metal Company’s stock, denied the impairment and necessity for a receiver, while Wybash Corporation contested the validity of the mortgage on grounds of lack of consideration. Following the dismissal of Arkansas Iron and Metal Company's bankruptcy petition, the court ruled in favor of the bank, finding the appellants were in default and that their security was significantly impaired. Yaffee had executed multiple promissory notes totaling $475,000 to the bank, secured by mortgages on real property and personal property of Arkansas Iron and Metal Company.

Yaffee's security agreement secured a note against the accounts receivable, inventory, and equipment of Arkansas Iron and Metal Company. On June 8, 1983, Yaffee executed a $10,069 promissory note, secured by her interest in a 1981 Cadillac, which was later surrendered to satisfy the debt. Additionally, Yaffee executed another promissory note for $10,000, also secured by the company's assets. On March 31, 1983, she provided a personal guarantee for all notes under Arkansas Iron and Metal Company. That same date, an agreement was executed for the company to assume various debts totaling $485,000 from multiple promissory notes dated between 1981 and 1982. The chancellor found that Yaffee and the company had defaulted on payments, impairing the appellee’s security. 

Appellants argued that the trial court erred in denying a continuance, claiming First National Bank of Fayetteville was an indispensable party under ARCP Rule 19. The trial court, exercising broad discretion, concluded that joining a minority stockholder was unnecessary for the mortgage foreclosure process. ARCP Rule 19 outlines conditions for compulsory joinder of parties, emphasizing that a person must be joined if complete relief cannot be granted without them, or if their absence could impair their interests or expose existing parties to inconsistent obligations. If a person cannot be joined, the court must decide whether to proceed or dismiss the action, considering potential prejudice and adequate remedies for the plaintiff.

Subsection (a) of Rule 19 identifies who qualifies as a 'necessary' party, while subsection (b) addresses the criteria for an 'indispensable' party. The Rule abolishes strict distinctions between these categories, focusing instead on the practical impact a judgment may have on absent parties. Appellants argue that the First National Bank of Fayetteville is an indispensable party due to its connection to the Yaffee children's equitable interest in Wybash Corporation and its role as trustee for a trust benefiting them. They assert that the absence of the bank prevents complete relief and could lead to inconsistent obligations for appellant Yaffee, who might face litigation from her children via the bank. However, the trial court concluded that the bank was not a necessary party, as shareholders are generally not required to be included in foreclosure actions against corporate mortgages. Legal principles indicate that a corporation is distinct from its shareholders, who do not hold individual rights to the corporation's property. Furthermore, service of legal documents to a corporation is properly executed by delivering them to an officer, as outlined in ARCP Rule 4(d)(5).

The trial court did not abuse its discretion in denying the appellants' motion for a continuance, rejecting claims that First National Bank of Fayetteville was an indispensable party. Wybash Corporation, rather than its shareholders or trustee, was the appropriate party to sue. The appellants also argued that the trial court erred in not directing a verdict for Wybash Corporation, citing a lack of evidence that Wybash received consideration for two mortgages. According to Ark.Stat. Ann. 64-801, corporate borrowings and mortgages of corporate assets do not require shareholder consent, except for increasing bonded indebtedness. The Arkansas Supreme Court's precedent allows consideration to flow from a promisor to a third party, as established in Quattlebaum v. Gray, which deemed the defense of 'failure of consideration' meritless. The trial court found that Yaffee had the authority to execute the mortgages on behalf of Wybash Corporation based on a corporate resolution. Additional issues raised by the appellants were not considered as they were introduced for the first time on appeal. Lastly, the appellants argued that the trial court erred regarding accord and satisfaction, but this defense was not specifically pled and was raised too late in the trial. The court clarified that receiving property under a court order does not equate to accord and satisfaction and that the Uniform Commercial Code provisions cited do not apply to real property transactions. The trial court's decision was affirmed.