Hope v. Valley City Salt Co.

Woods, Judge : The questions presented for our consideration are:- — ■ Was the deed of trust made to secure Peter Harpold his alleged debt of $14,368.46 fraudulent in law or in fact? Was the deed of trust to Howard, trustee, dated August 13,1878, to secure E. C. Harpold, his alleged debt of $12,000.00, fraudulent in law or in fact, and if said deeds or either of them, was for any cause fraudulent or void, how, and to what extent have the rights of the appellant been affected by the several sales and conveyances made under said deeds .of trust ? What rights, if any, did E. C. Harpold or his vendee, the .¿Etna Coal and Salt Company acquire under the conveyances made to them respectively ? Correct answers to these questions must be couclusive in this controversy. It is contended by the appellees, Hope and wife, that the deeds of trust to Myers for the benefit of Peter Harpold, and to Howard for the benefit of E. C. Harpold, are fraudulent in law and in fact, and therefore void. Their counsel in argument contend that the corporation could not lawfully contract with Peter Harpold, nor with E. C. Harpold, because they were members of the corporation ; they were in effect contracting with themselves, and that this was especially true of the alleged note of $12,000.00, and the deed of trust to Howard, as E. C. Harpold was at the time, the president, general manager and a director of the corporation. It seems to us that it can not be successfully maintained that a corporation aggregate, can not lawfully enter into a contract with or borrow money from its own stockholders, and that if it does do so, the contract entered into, the obligation executed, and the deed of trust or mortgage made to secure the same is for that cause alone fraudulent and void. Few corporations aggregate created for the purpose of carrying — 797 — on any important branch of manufacturing or mining industries, have ever been formed, or will probably ever be formed, which have not been obliged in the earlier stages of development to borrow money, and frequently large amounts of money, to put the business upon a paying basis. Under such circumstances it would on business principles alone be unreasonable to expect strangers wholly unacquainted with, and uninterested in the proposed enterprise to advance such necessary. funds without security other than that of the corporation, and if to be secured by others, by whom so natui’ally as by the individual stockholders of the corporation, who were personally interested in, and had at least partial control over the conduct and management of its business. If such a liability be incurred to a stranger, so secured by individual stockholders, why may not the corporation further secure him and such sureties by a deed of trust or mortgage on part of its property, unless prohibited by law from doing so, and if such sureties may be so secured collaterally, what good reason can be given why the loan may not be made by stockholders to the corporation, and secured by it to him in like manner? This is no now doctrine, for as by the common law a corporation aggregate can contract with persons who are not members, so it may contract with persons who are members of it, and the contract will not on this account alone be invalid, as a member of a corporation contracting with it, will be regarded as a stranger. The same is clearly laid down by Judge Story in the Dartmouth College case, where he says : A corporation aggregate is an artificial person existing in contemplation of law, and endowed with certain powers and franchises, which though they must be exercised through the medium of its natural members, are yet considered as subsisting in the corporation itself as distinctly as it it were a real person.” Hence such a corporation may sue and be sued by its own members, and may contract with them in the same manner as with strangers. Angell & Ames on Corporations, section 233; Dartmouth College v. Woodward, 4 Wheat 518-667; Merick v. Peru Coal Co. 61 Ill. 472. The same reason applies with equal force to the trust-deed to Howard, trustee, for the benefit of E. C. Harpoldso far as the validity of the same is called in question • upon the sole — 798 — ground that he also was a stockholder in said corporation. It is not alleged that the deed of trust of February 7, 1870, to Myers, trustee, is void because Peter Harpold the beneficiary therein was at the time of the execution thereof a director of the Valley Oity Salt Company, or because he then held or occupied any other fiduciary relation to it, but its validity is assailed upon the ground that his pretended debt had no existence; that he had never advanced or loaned to the com - pany the sum of $14,386.46, or any part of it, and that the obligation executed to him for that sum and the deed of trust to secure the same, were made without any valuable consideration, andtherefore were fraudulent and void as to the plaintiffs’ demand. All these, and evei’y other allegation of the bill calling in question the validity, and good faith of the whole transaction are explicitly denied by the answer, and aside from the record-evidence of the execution of the obligation and of the deed of trust to Myers, trustee, the plaintiff's have not offered the testimony of any witness, nor does there appear in the record any evidence whatever, that the said company on February 7,1870, did not justly owe Peter Har-pold the debt of $14,386.46, or that the execution of the obligation to him for that sum, and the execution of the deed of trust to secure the same, were not made to and accepted by him in perfect good faith. The company was incorporated on the 4th day February, 1869; the lands purchased by the company, upon which it constructed its furnaces, &e., were all purchased in April, 1869, and the same were conveyed in trust to Myers on February 7, 1870, to secure said debt oí $14,386.46, and while it does not appear exactly when the $90,000.00 expended by the company in the construction of its furnace, sinking wells, &c., was done, yet we may reasonably conclude that as the whole capital-stock of the company was only $33,700.00, in making the expenditure of $90,000.00, it must have borrowed large amounts of money from some person, and as Peter Harpold was one of the corporators, and subscribed for forty shares ($4,000,00,) of the capital stock of the company, it would not seem unreasonable or improbable that the company should become indebted to him in an amount as large as that secured to him. Npon the three small parcels of land embraced by his trust-deed were erected — 799 — improvements, which by the admission of all parties cost the sum of $90,000.00, and he evidently at that time, and always afterwards until and at the sale thereof on October 7, 1878, considered the same an ample security for his debt, which when contracted was payable in one or two years after its date at the election of the debtor. He permitted this large debt to remain unpaid, contenting himself the first five years with the annual interest thereon, and thereafter until the sale under the trust with less than half the annual interest. At the sale he purchased the land for $6,100.00, which w'as less than one third of the balance remaining unpaid on the trust-debt. It being lawful for the corporation to borrow money from or enter into a contract with one of its stockholders, and no evidence being adduced to show that this transaction was not perfectly fair, we are of opinion, that the obligation of the Valley City Salt Company to Peter Harpold, and the deed of trust executed to J ohn H. Myers to secure the same are neither fraudulent in law nor in fact, and that the said deed of trust is a valid security for the balance still unpaid upon said trust-debt of $14,386.46. A wholly different state of facts is presented in regard to the execution of the note of $12,000.00 to E. C. Harpold and the deed of trust made to Howard, trustee, to secure the same. "Was their note and deed of trust fraudulent in law or in fact? To determine this question properly, let us review all the circumstances preceding, surrounding and following it. Unless it be admitted that the property mentioned in the deed of trust to Myers, sold .on October 7, 1868, to Peter Harpold for $6,100, was sold at a most ruinous sacrifice, a grossly inadequate price, the Valley City Salt Company on August 13, 1878 and long before that time, was utterly, hopelessly insolvent; and this fact was as well known to E. C. Harpold on July 1, 1878, when it became indebted to,' and gave its note to the plaintiff, John Hope for $2,415.00 payable six months thereafter, as it was when it became indebted to him in the further sum of $267.37 in September, 1878, for he was at that time and since January, 1873, he had been the president, and a director and the general manager of all its business transactions having at all times access to, and control over the books of the company, and its true — 800 — financial condition was well known to him. lie knew the value of its property real and personal, and could have known and doubtless did know what each and every tract or parcel of land, or article of personal property had actually cost the company. With all this knowledge, with the influence which his position as director, president and general manager, which must under all the circumstances detailed in this record have been almost if not quite equal to that of sole owner and proprietor, with his brother, his uncle, his father-in-law and his book-keeper, all members with him of the board of directors of the company, he says in his answer that, “the note of $12,000.00 and the deed of trust to secure the same dated August 13, 1878, were both executed by the authority and direction of the board of directors of the Valley City Salt Company by a resolution passed by said board of directors at a legal meeting thereof held by them on August 12,1878, and in accordance with the terms and provisions of said resolution.” This and every other affirmative allegation of his answer was expressly denied by the plaintiffs’ general replication. The note of $12,000.00 was notproduced on the trial, nor its absence explained or accounted for, nor was the said resolution of the board of directors authorizing and directing the execution of the note and deed, nor was there airy evidence of any kind offered in support thereof, and we must therefore treat this case as if no such authority and direction had ever been given. Themostfavorable light, under which we can consider it, is furnished by the recital and execution of the deed of trust itself. It recites: “ This deed made this 13th day of August, 1878, between the Valley City Salt Company, an incorporated company, duly incorporated under the laws of West Virginia, by its president, E. C. Harpold, and C. F. Knarean, its secretary, of the one part, and II. R,. Howard, of the other part, witnesseth,” &c., and concludes: “ In witness whereof the Valley City Salt Company, by its presi-ident and secretary, have hereunto signed the corporate name of said company and affixed the seal of said company on the day and year above mentioned. ( Valley City Salt Co.7 “Valley City Salt Company, -< Seal. I “ By E. C. IIaRPOLD, President, l West 'Virginia. j « a E. Knarban, Secretary ” — 801 — This deed contains the further recital, that it was (among other things) to secure one note given by the Yalley City Salt Company, by its president and secretary to said E. 0. Har-pold for $12,000.00 bearing even date herewith and due in five days after date, which note was authorized to be given to the said E. C. Harpold by resolution of the board of directors at a meeting of the board of directors of said company, held at the office of said company on the 12th day of August, 1878, but it contains no recital that the deed of trust was so authorized to he executed. If any such meeting of the directors was ever held on the 12th of August, 1878, and any such resolution was ever adopted, or any such debt ever existed or remained unpaid, E. O. Harpold had in possession and subject to his control abundant evidence to prove it. Said Knarean was the secretary of the company and had also for four years been his head clerk and salesman in his store where this alleged debt of $12,000.00 was incurred, and the record of the proceedings of said company were also under his control, and they if produced, would have furnished evidence of this meeting and of the adoption of this resolution if such ever existed. The fifty-second section of the fifty-third chapter of the Code of West Virginia declares that, “ They (the board of directors) shall keep a record of their proceedings, which shall be verified by the signature of the president or president pro tempore. No member of the board shall vote on a question in which he is interested otherwise than as a stockholder, or be present at the board wrhile the same is under consideration; but if his retiring from the board in such case reduce the number present below a quorum, the question may nevertheless be decided by those who remain. On any question the names of those voting each way shall be entered upon the record of their proceedings if any member at the time required it.” The record does not disclose which members of the board were present, and participating in the proceedings, at the meeting alleged to have been held on August 12, 1878. All these facts could easily have been shown by E. C. Harpold either by the record, his own oath or the testimony of the other directors. Said C. E. Knarean was produced and examined as a witness on behalf of the plaintiffs, and having proved that E. C. Harpold was the — 802 — president and gen eral manager of the company, be was asked by the plaintiffs counsel to “ State all you may know in reference to the execution oí a deed of trust by the Valley City Salt Company to H. R. Howard, trustee, on August 12, 1878, to secure $12,000.00 to said E. C. Harpold and other defendants therein mentioned.” He answered : “ I know that they made the deed of trust. It was executed to secure E. C. Har-pold the $12,000.00. I don’t know anything only they made the deed of trust.” The witness was cross-examined by E. C. Harpold, and in answer to questions propounded by him he stated that he was the book-keeper of the company from September, 1877, to September, 1878, and was the head salesman in E. C. Iiar-pold’s store from July 14, 1874, until September, 1878; that when he took charge of the books they showed the company owed E. O. Harpold about $7,000.00, and up to September, 1878, about $14,000.00, and that the note and trust-deed for $12,000.00 were given for that account. This witness probably knew all about the meeting of directors, if one had been held on August 12, 1878. He was evidently not present at such a meeting. Was E. C. Harpold present at and participating in its proceedings in regard to his own debt ? If he was, he was doing what the law expressly forbade him to do. Hid he withdraw from the board while it was considering the resolution alleged to have been adopted directing and author-izingthe execution of the note and deed of trust ot $12,000.00 ? If he withdrew, there could have been none present and acting save his brother, C. L. Harpold, his uncle, Peter Har-pold, and his father-in-law, Rankin Wiley, Sr. Such a resolution, adopted under such circumstances, for the benefit of a director, president and general manager of the company, carries with it such suspicions of unfair dealing, that in order to be upheld in a court of equity against the claims of honest creditors, who arc 1 hereby deprived of every means of obtaining satisfaction of their debts, it requires to be supported by evidence so strong and clear as to remove every reasonable doubt of the fairness and honesty of the transaction ; but E. C.. Harpold, full handed with this proof, if his answer be true, produces no evidence of its fairness, and we can not resist the conclusion, that if he had produced this evidence, it would — 803 — have been against him 1 Stark Ev. 545; 1 Greenl. Ev. section 37; Knight v. Capito, 23 W.Va. 653. With all these circumstances of suspicion, without explanation and withoutthe slightest effort to explain them or to remove these indications of fraud, we are brought to the conclusion that the said deed of trust to Howard, trustee, was fraudulent. But coupling with the foregoing facts, the following facts, that this deed of trust conveyed not only all of the real property of the company, but also all of its tangible personal property, including twelve horses and mules, four two-horse wagons, two carts, twenty-seven coal-cars, 600 feet of iron auger, two salt cars, and two salt-cars at the Ohio river, used in loading salt at the river; three double sets of wagon-harness, one iron safe and two desks in the office; 23,000 feet of pine plank, 250 feet of tubing taken from the salt-well; '400 feet of new augur poles, 320 feet of two-inch pipe, and a large amount of other articles of property, none of which has ever been sold; and also that the land bought by Peter Harpold for $6,100.00 was conveyed the same day to E. C. Harpold for $21,000.00, and that E. O. Harpold bought all of the real estate of the company embraced in his trust for $800.00, one parcel of which he admits was worth at least $4,000.00, and that E. C. Harpold was willing to secure the payment of said $21,000.00 to Peter Harpold by conveying to a trustee for his benefit the lands so purchased from him, and also all the lands purchased under his own deed of trust, and also of five town lots in the town of Hartford City, and that he in three days afterwards sold and conveyed a part of said lands including said five town lots to the AEtna Coal and Salt Company, of which he was president, director and general manager, in which he owned 396 outof the 400 shares of its capital stock, at the price of $34,175.00, which company was incorporated on the 2d of October, 1878, apparently for the convenient purpose of swallowing up all the assets belonging to the Valley City Salt Company, at the expense of its creditors and free from its debts, it is impossible to resist the conclusion, that the said lands of the Valley City Salt Company were sold to said Peter Harpold and E. C. Harpold at prices so grossly7 inadequate as to be of itself almost conclusive evidence of fraud, and ought not to be permitted to stand in the way of the plaintiffs in the collection — 804 — of their debt; and that the deed of trust to Howard to secure the payment of the alleged debt of $12-,000.00 to E. C. Har-pold, and the said deed of trust to Rankin 'Wiley, Sr., to secure the payment to Peter Harpold of said $21,000.00, and the sale and conveyance made thereunder to said Peter Har-pold, and said conveyance made by E. C. Harpold to the .¿Etna Coal and Salt Company on the 10th of October, 1878, are each and all of them, as to the'plaintiffs’ demand against the Yalley City Salt Company fraudulent in fact as having been made to hinder and delay them in the collection of their debts against said company. It only remains to consider whether the deeds of trust to Myers, trustee for Peter Harpold, and to Howard, trustee for E. C. Harpold are fraudulent in law. The directors of a body corporate act in a fiduciary capacity to the corporation and to stockholders, and they are generally disabled from so dealing with the interests confided to their care with a view to their own advantage, and any purchase made, or act done, in the prosecution of such a purpose, may be set aside by the stockholders and those claiming under them as creditors. James, &c. v. Railroad, Company, 6 Wal. 752; Drury v. Cross, 7 Wal. 299. In Newcomb v. Brooks, 16 W. Va. 32, this Court held that a person who occupies a fiduciary relation, is bound not to exercise for his own benefit, and to the prejudice of the party to whom he stands in such fiduciary relation, any of the powers or rights, or any knowledge, or any advantage of any description, which he derives from such confidential relation ; and a purchase of the trust-property by such fiduciary while holding such relation, either from himself or from the party to whom he holds such relations, is voidable at the option of the party to whom he stands in such relation, although he may have given an adequate price for the property and gained no advantage whatever. This general rule so laid down by this Court is sustained by an overwhelming weight of authority in England and this country, and in very many cases the rule has been adhered to with such strictness as to exclude testimony tending to show that the particular case under consideration was absolutely free from every possible taint of fraud or unfairness. In Ex parte Lacy, 6 Vesey 627, Lord El — 805 — don laying'down this rale, said: “The rale is founded in this, that though you may see in a particular case, the trustee has not made advantage it is utterly impossible to examine upon satisfactory evidence in the power of the court (by which I mean in the power of the parties), in ninety nine cases out of a hundred whether he has made advantage or not.” Justice Wayne delivering the opinion oí the Supreme Court of the United States in Michond v. Girod, &c., 4 How. 555, said: “The general rule stands upon our great moral obligation to refrain from placing ourselves in relations which ordinarily excite conflict between self-interest and integrity. It restrains all agents public and private. * * * * It prohibits a party from purchasing on his own account that which his duty or trust requires him to sell on account of another; and from purchasing on account of another that which he sells on his own account.” In the application of this principle, it makes no difference whether the fiduciary stands alone, or is one of many who occupy the same fiduciary relation. Each fiduciary has no more right to purchase from his co-fiduciary than he would have to purchase from himself, if he alone occupied the position. The Cumberland Coal Company v. Sherman, 30 Barb. 553. See opinion of Green, Judge, in Newcomb v. Brooks, supra., and the cases there cited. In the cases where this rule applies, the purchase of the property by the fiduciary is not absolutely void, but only voidable by the cestui que trust or those occupying a similar position, and even in those cases where the strictness of this rule has been somewhat relaxed, the courts have uniformly held that the purchase by a fiduciary of trust-property will always be scanned in a court of equity with suspicion, and will never be sustained unless it fully appears fair and reasonable, and that no advantage has been taken by the fiduciary of his position, over the cestui que trust, and that he has withheld from him no information which he had the right to know, and wdfichit was the duty of the fiduciary to impart to him. It was held in Butts v. Wood, 37 N. Y. 317, that the relation held by a director in a corporation, is that of a trustee; and that where one member of a board of directors presents to such board a bill for extra services, he is disqualified to act as director upon the question of — 806 — allowing said bill and directing the same to be paid. In the case of The City of Fort Wayne v. Rozenthal, 75 Ind. 156, that an officer of a city can not as agent contract with himself, personally buying what he is employed to sell, or hiring himself to do a service which he is employed to procure to be done. The board of health consisting of three physicians, were by law authorized to employ some competent person to vaccinate certain children whose parents were unable to pay for the same. Two of the board held a regular meeting and employed one of their own number to render this service, which he performed, and when he presented his bill for his services the city refused to pay, because he had in effect contracted with himself, and so the supreme court of Indiana held. So in Pickett v. School District, &c., 20 Vt. 551, it was held that where two members of the board of directors of the district entered into a contract with the third member to build a school-house for a certain price. Upon suit brought by him to recover the contract price, it was held that his contract was void, on the ground that he had in effect contracted with himself. Davis v. Rock Creek L. F. & M. Company, 55 Cal. 35; Wilbur v. Harris, 49 Cal. 290; City San Deigo v. San Deigo Railroad Company, 44 Cal. 106. Numerous similar eases might be cited, for whatever rule may have been adopted in other states, it seems to us that a different rule was adopted in the State of Virginia before the formation of this State, and the decision of her court of appeals is binding authority upon us, and we do not feel disposed to depart from it. Whatever evils may result, and many of them do result from the relaxation of the rule we have been considering, it may be they will be more than equalled, by the pecuniary aid and encouragement, which in consequence thereof, may be safely given by directors and officers of corporations to enable them safely to carry on their busi ness. This question was elaborately discussed by the bar, and considered by the court of appeals of Virginia in Burr’s executor, &c. v. McDonald, &c., 3 Grat. 215, wherein that court held: “ That as a corporation may contract debts to its individual corporators, it is as much bound to pay or secure such debts as debts due to strangers, and the fact that a deed is given to secure such debts does not render it fraudulent, unless such fraudulent intent is shown.” It is — 807 — to be observed, however, that in this ease the preferred creditors of the corporation were stockholders, and that the deed was ordered to be made by the stoekholdei’s in general meeting assembled, and not by the directors ; nor for the benefit of another director. This case was decided by the court of appeals in 1846, but it left untouched the question as to the effect of such a deed of trust, had the same been made by one or more members of a board of directors to or for the benefit of another director or any other officer of the corporation holding towards it a fiduciary relation. But it may be safely assumed that in any case where one director participated with others in any act in regard to the trust-property, for the benefit of the fiduciary, at the expense of the cestui que trust such act was for that cause fraudulent as to him. But it would seem from the fifty-second section of the fifty-third chapter of the Code of West Virginia, supra, that this rule has in effect been modified, for it evidently concedes that even directors may enter into contracts with other directors in regard to the corporate property, which so far from being declared for that cause void is expressly made lawful to be done, even by number less than what is necessary to constitute a quorum, In such a case the director interested other than as a stockholder in any question is not permitted to vote on it, or to be present at the board while it is under consideration, he is required to withdraw, and then the question my be decided by even less than a quorum. This would seem to leave every such act of the director open to explanation but we are of opinion that even then, unless it was made to appear by clear and convincing testimony that such act was free from all taint of fraud or unfairness on the part of said director, it ought to be set aside at the option of the beneficiary or of the party standing in such position. Such advantage so obtained by such director ought to be held as prima fade fraudulent, yet capable of being pui’ged of the fraudulent taint by clear and convincing proof of its fairness, reasonableness and absolute freedom from fraud and unfairness. Like a conveyance of property from a husband to his wife, it may be honest, and will be so held, when she has clearly shown she has purchased and paid for the same out of her own separate estate not derived from her — 808 — husband, but not until she has done so. Smith v. Skeary, 17 Conn. 47; Twin Lick Oil Company v. Marbury, 91 U. S. 587; Addison, &c. and Blythe, &c. v. Lewis &c., 75 Va. 701. In this last case it was distinctly held, that when a director of a corporation charged with others with the control and management of the corporation lends money to the corporation and so becomes a party to a contract with the company his obligation to deal candidly and fairly with the company is increased in the precise degree that his representative character has given him power and control in the affairs of the company ; but the general doctrine with this class of contracts is not that they are absolutely void, but that they are voidable at the election of the party, whose interest has been so represented by the party claiming under the contract. Applying these principles of law to the facts of the case under consideration we are further of opinion that the said deed of trust executed to the said Howard, trustee, dated August 13, 1878 to secure the said E. 0. Harpold the sum of $12,000.00 is not only fraudulent in fact but for the reasons herein stated is fraudulent in law, and thcrefoi’e there is no error in the decree of the circuit court of Mason county rendered herein on September 20, 1882, and the same is affirmed with costs to the appellees and damages according to law. AEEIRMED.