Rylander v. Sheffield

Little, J. To properly determine whether there was any error committed in the refusal to grant the injunction as prayed for, it is only necessary to consider and determine one question of law — that is, can the directors of a private corporation, who, with the knowledge and assent of the stockholders, became guarantors of a debt created by the corporation for a loan of money secured by mortgage on the property of the corporation, pay the debt at maturity, take a transfer of the mortgage, and enforce the same by foreclosure and sale of the mortgaged property to secure the amount of the debt paid by them ? The plaintiffs in error say they can not, for the reasons that the corporation is solvent and the value of the property is largely in excess of the amount of the debt; that the holder of the note and mortgage agreed at maturity that he would extend the time of payment of the same, if the same directors would con [115] tinue their guaranty; that the directors occupy a fiduciary relation to every stockholder; that they can not exercise their trust for their own private benefit, and their private interest must yield to their official duty; that a director can not create .a relation of antagonism in interest to the stockholder, nor lawfully make a profit out of his trust. The principles of law thus stated seem -to be sound and controlling in cases where they can be made applicable. In the present case, however, the defendants in error, who were directors, with the assent of the stockholders of the corporation used their personal credit to raise necessary funds for the benefit of the corporation, by becoming personally liable for a debt lawfully created by the corporation. The holder of the debt then became a creditor of the ■corporation, as well as a creditor of those directors who person.ally endorsed -or guaranteed the debt. When the debt matured, it was the duty of the corporation to pay the same; and •on failure to do so, it was the personal duty of the guarantors so to do; and on failure of*payment, the creditor had a right, not •only to enforce his lien against the property of the corporation, but to secure as well a personal judgment against the several •directors who guaranteed the payment; and there can be no •question that when the latter paid the debt and took a transfer of the lien, which in their contract of guaranty they were •entitled to have, the rights of the creditor passed.to them. Possessing such property rights, it must follow that the right ■of enforcing them exists as an incident of ownership. The facts of this case clearly distinguish it from those cases where the directors of a corporation seek by their fiduciary relation to promote their own interest at the expense of the •stockholders. There is no reason why a solvent corporation may not borrow money from a person who occupies the position of a director in such corporation, and give him a mortgage to secure the debt thus created. It is said in such cases that the giving of the mortgage is viewed with suspicion, but that it is legal when it is perfectly free from actual fraud. 91 U. S. 587. And in the case of Hopson v. Aetna Co., 50 Conn. 597, it was expressly ruled that directors who guaranteed a •corporate debt may take a mortgage from the corporation as [116] security, and foreclose the same. It must be remembered,however, that a distinction may be shown to exist when the corporation so creating the lien is insolvent. We are not now concerned as to the rules applicable in the case of liens created by insolvent corporations; for, confessedly, this corporation was solvent when it created the lien, and is so now. From a number of adjudicated cases the following rules have been deduced by Mr. Taylor in his Treatise on the Law of Private Corporations: §634: “Directors or other officers may, when they honestly deem it for the interest of the corporation to borrow, advance it money on terms as favorable as any on which they could have procured the money for it from other-sources ; and they may take from the corporation security for their loan. But they can not — at least when the corporation is insolvent — take advantage of their inside position to secure-their existing debts to the injury of other creditors of the corporation; and no more in recovering their debts or enforcing their security, than in the original transaction of loaning the-money, can they disregard the interest of the corporation. Under such circumstances, not only may they not avail themselves of their control over the affairs of the corporation to oppress it, but they can not make unconditional and unrestricted use of legal means open to outside creditors.” Citing-77 Ill. 226; 86 Ky. 206; 21 Am. L. Reg. N. S. 443. It does-not appear from the record in this case that the defendants in error sought to oppress the stockholders of the corporation in any way. The debt which they sought to enforce was a legal one due by the corporation; it could at any time have prevented foreclosure of the mortgage by the payment of the debt; and there was no obligation on the part of the directors who personally guaranteed the debt, when the original contract matured, to continue that contract, even if the corporation from its revenues could eventually pay off the debt. If- it did not, because of the want of money, no legal reason existed, why the-holders of the debt should wait an indefinite time for payment. None of the circumstances show that the defendants in error, either in the original transaction or in subsequent proceedings to collect their debt, were guilty of any fraud toward the other [117] stockholders of the company, nor was their action calculated in any way to oppress the stockholders. The judgment of the court below is Affirmed. All the Justices concurring.