260 261 JAMES V JFK CARWASH INC Supreme Court of Arkansas 1982 JFK Carwash Inc

260 261 james v jfk carwash inc supreme court of

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JAMES V J.F.K. CARWASH, INC. Supreme Court of Arkansas, 1982 J.F.K. Carwash, Inc., an Arkansas corporation, was owned in one-third interests by Mansell, Grubbs, and James. All three agreed that James’ interest would be repurchased by the corporation so he could get out of the business. JFK Carwash issued a promissory note for the purchase, and it was secured by the personal guarantees of Mansell and Grubbs. At that time, Carwash had a deficit of $16,184.36 and had no “unrestricted earned surplus.” However, Arkansas law requires that a corporation repurchase its stock out of “unrestricted earned surplus.” Subsequently, Carwash was unable to make its payments on the promissory note, and James filed suit to recover the unpaid principal. Mansell and Grubbs argued that the note was void because it was an “ultra vires” act. DUDLEY, Justice. * * * * The issues on appeal are whether a corporate promissory note which was given for an ultra vires repurchase of corporate stock is void and whether there is liability because of an accompanying personal guaranty of the corporate promissory note. * * * * * * * The ability of a corporation to acquire and dispose of its own shares is one of the segments of a symmetrical statutory structure dealing with corporations. Section 64-104 [Arkansas Statutes Annotated] grants general powers to a corporation. Section 64-105 delineates the restrictions on a corporation purchasing its own stock and Section 64-106 provides that when a corporation acts in excess of its powers such action will not be invalid solely because the corporation was without either the capacity or the power to do such act. This latter section provides: Defense of ultra vires. -No act of a corporation and no conveyance or transfer of real or personal property to or by a corporation shall be invalid by reason of the fact that the corporation was without capacity or power to do such act or to make or receive such conveyance or transfer, but such lack of capacity or power may be asserted. None of the conditions for asserting lack of capacity or power are applicable to this case. They are: a. A shareholder may sue the corporation to enjoin the performance of an ultra vires contract. b. A stockholder may bring a derivative suit for damages in favor of the corporation against officials who have diverted business by ultra vires acts. c. The Attorney General is authorized to enjoin unauthorized or ultra vires acts. The juxtaposition of the statutes is not mere coincidence; it is because the General Assembly wanted to confer limited powers on corporations and to limit causes of action and defenses based on an act in excess of those powers. None of the statutory conditions are present for an assenting stockholder to assert the defense of ultra vires. The promissory note is not invalid as an ultra vires instrument and, accordingly, the underlying personal guarantee is not invalid. * * * * * * * NOTE: Even though the promissory note was executed in violation of the Arkansas statute
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