Pitman v. Chicago Lead Co.

ELLISON, J. Plaintiff is an attaching creditor of the defendant' corporation and interpleader filed his interplea claiming the property attached by plaintiff. At the close of the evidence for interpleader the trial court refused an instruction directing a verdict for plaintiff, and on the latter refusing to introduce evidence in his own behalf the court rendered judgment for interpleader and plaintiff has brought the case here. It appears from testimony in interpleader’s behalf that the defendant corporation was controlled by a body of five directors, R. G. Blair being one of them, and that he was a creditor of the corporation, for money borrowed, in a balance due him of of $1,200. The defendant had met with misfortunes and found itself hopelessly insolvent, owing near $30,000 and having assets of near $5,000. In this situation of affairs, four of the directors, including Blair, met and ordered sold and conveyed to Blair (he not voting) in payment of $1,000 of his claim, substantially all of the tangible property of the corporation. Afterwards, at the same meeting, a general assignment was made. Blair then sold the property to inter-pleader. But as it appears that this was merely formal and — 596 — that Blair is the real party in interest, we will treat him as the interpleader. Plaintiff concedes that an insolvent corporation can pre^ fer a creditor even though such creditor is an active director of the corporation. But he insists that the onus is on the director to show that the debt and preference given were bona fide. The interpleader denies this and places the burden on the party attacking the transaction just as it would be in case of a stranger creditor. The law seems to be well settled in this State that a corporation, though insolvent, if in untrammeled possession of its property may, as a sequence of its jus disponendi, prefer a creditor. That though insolvent, the corporate property is not a trust fund to be administered by the directory for the equal benefit of all creditors. And that the fact that the creditor preferred is also a director of the corporation does not prevent, or avoid the preference. Foster v. Mullanphy Planing Mill, 92 Mo. 79; Alberger v. Bank, 123 Mo. 313; Milling Co. v. Commission Co., 128 Mo. 473; Schufeldt v. Smith, 131 Mo. 280. The courts in some of the states do not agree to such view; though it meets with approval in others. Among the lattér is Pennsylvania: Mueller v. Fire Clay Co., 183 Pa. St. 450; Cowan v. Plate Glass Co., 184 Pa. St. 1; Finch Mfg. Co. v. Stirling Co., 187 Pa. St. 596; Creighton v. Scranton Mfg. Co., 191 Pa. St. 231. Nor does the fact that the corporation giving the preference, afterwards on the same day, makes a general assignment, affect the preference. Milling Co. v. Commission Co., 128 Mo. 473. So, therefore, notwithstanding the defendant corporation in this case had the legal right to prefer Blair although he was a' director, yet the further question is, on whom is the burden of showing, in the first instance the bona fides of the preference? Ordinarily, a fraudulent purpose of a transaction, or its illegality, will not be presumed but must be shown by him who asserts it. Mansur v. Ritchie, 143 Mo. 610. — 597 — That, however, is not always the rule. If the relation between the parties, stated broadly, is that of trust and confidence, the presumption is that any act of the agent, or trustee, for his personal benefit, is fraudulent and it will be avoided unless he rebuts the presumption by coming forward and showing the bona fides of the transaction. Such relation exists between trustee and cestui que trust; guardian and ward; attorney and client; physician and patient Garvin v. Williams, 44 Mo. 465; Bogie v. Nolan, 96 Mo. 85. The rule is not confined in application to these relations alone. It “finds application commensurate with the existence of confidential relations.” It is familiarly known to exist between principal and agent. Street v. Goss, 62 Mo. 226; Story on Agency, secs. 210, 211, 212; Mechem on Agency, Secs. 463, 469. But it has been said that the directors of a corporation are not the agents of the creditors of the corporation — that they are the agents of the stockholders. And it has been said that they are not trustees. Be that as it may, while they are not technically trustees, they are such in the sense that they will not be allowed to take an unfair advantage resulting from their position. They occupy a fiduciary and trust relation. 1 Morawetz on Corp., secs. 516, 517, 518; Hill v. Rich Hill Coal Co., 119 Mo. 22; Schufeldt v. Smith, 131 Mo. 280. In the matters and instances here stated the law is jealous of any transaction which such fiduciaries have with themselves for their benefit. And it requires them to purge themselves of what may be termed a legal suspicion of unfair dealing by coming forward and showing the matter to be without taint. And so it was ruled by the Supreme Court of this State in Schufeldt v. Smith, supra, the court using these words: “While the directors-of a corporation do not sustain the strict relation of trustee for its creditors, yet their duties to them and their relation to the corporation itself are such as impose upon them some of the obligations of trustees. In dealing with the corporation they deal with themselves. They — 598 — determine the liability of the corporation to themselves. They should, therefore, be required, in case they give themselves a preference over other creditors, to show that all their secured debts are fair, honest, and justly due them. This burden properly rests upon them.” We realize that the question is in a somewhat confused condition in this State at the present time. In St. Louis v. Alexander, 23 Mo. 483, there was no decision of the question. The separate opinion by Judge Rtland puts such acts of directors for their own benefit on the same ground as that occupied by strangers seeking a preference — that their act was not a badge of fraud (pp. 524-531), while Judge Scott took the opposite view (pp. 522-524). So in the late case of State ex rel. v. Rubber Mf’g Co., 149 Mo. 181, in an opinion by Judge Valliant of Division One, it is held that a transaction with the directors to prefer themselves is presumptively fraudulent and that the burden was on them to show its fairness. In that opinion Judge Brace concurs, but Marshall, J., took the opposite view and, as shown by the class of authorities he cites, places such case on the same footing with stranger creditors seeking preference. Judge Robinson concurs in the “result” of Judge Valliant’s opinion. So, as to that case, there is no authoritative decision of the point by the court, and it is not therefore of binding force on this court. But we do not agree with Judge Marshall’s conclusion that the statement in Schufeldt v. Smith, ante, that the burden was on the preferred creditor, was an oversight. There is nothing in the course of the opinion tending to show that the court did not intend to lay down the rule that the burden was on the director obtaining preference. It is true, the opinion states that the directors’ act in obtaining preference was not constructively fraudulent, and that the act of the corporation in giving the preference was not- a fraud. That is to say, the mere act of obtaining preference and the mere act of giving preference, were not, of themselves, fraudulent acts. Such — 599 — action could be shown and yet if it was further shown to have been in good faith it would be upheld. There is nothing in such statement inconsistent with the further statement that if the good faith was not shown the preference would be presumed to be fraudulent. We therefore regard the case of Schufeldt v. Smith as deciding that the burden of showing the bona tides of the transaction is upon the preferred director. It is therefore binding on us. We quite willingly follow it, convinced as we are that it is in line" with the universally recognized rule above referred to that where the relation is in its nature a trust or fiduciary relation, that any act of the party so entrusted whereby he secures an advantage for himself deserves to be scrutinized by the courts, and calls for a full showing of good faith on his part. It is certainly a just rule as applied to director creditors. If a stranger creditor of a corporation, wishing to secure his claim, calls upon the directory for that purpose and learns from them that they have appropriated the assets to themselves to pay or to secure claims of their own, what could be more natural than that the stranger would ash for a showing of the inside of affairs and that the directors, with honest claims, would feel that they ought to make such showing ? Such preferred creditor ought to show that the debt was not fictitious, that it was preferred without collusion for the purpose of giving an honest preference without a design to defraud other creditors; and that the price, if the transaction be a sale, was (substantially) as much as they could have realized from others; and that no special circumstance was known making it hazardous for or against the interest of the corporation. But ought he not also to show further that the. preference became effective without the necessary aid of his own vote ? and that it was not the result of an undue influence on his part? We think he should. In our opinion, a preference which has been given to a director and which could not — 600 — have passed the directory without the aid of his vote, is invalid. While the assets of‘a corporation in possession of its property are not a trust fund for the equal benefit of all its creditors, since the directors act in a representative capacity 1 — since they occupy a position, of trust and confidence^ — they can not serve the private interests of themselves and the corporation when in antagonistic positions. They can not serve two masters with opposing interests. It was so decided in Foster v. Planing Mill Co., 92 Mo. 79, Hill v. Rich Hill Coal Co., 119 Mo. 9, and Bennett v. Car Roofing Co., 19 Mo. App. 349. And this view is based on natural justice. It is in accord with authority elsewhere. 1 Beach Priv. Corp., sec. 242; 2 Spelling Priv. Corp., sec. 714; Taylors Priv. Corp., sec. 628; 1 Morawetz on Corp., secs. 517 and 518; 2 ib., see. 787. The rule does not interfere with the right of a director to secure a preference of his debt from the corporation, but he must do so by the act of a quorum of other directors. When he acts, for himself, he, as to such act, ought to become a stranger to the corporation and must seek and obtain any proper and legal advantage by the vote of others than himself, and without undue influence of his position. This is recognized by the Supreme Court in the Foster and Hill cases, supra. And so it is stated in 1 Morawetz on Priv. Corp., sections 521, 527, 530. The mere fact that he does not vote to prefer himself, does not necessarily show that he has not had an improper influence and advantage, by reason of his position. Finch v. Stirling Co., 187 Pa. St. 596, 601. Applying the foregoing to the facts of this case, we find that while the preference was given to a director by a quorum of the directory without the vote of Blair, yet there was no other disclosure made or attempted by interpleader, save that the debt was genuine. This, as disclosed by what we have said, was not a sufficient showing to relieve him of the presumption which arises against him on account of his position. — 601 — While what we have written is in line with the cases decided by the Supreme Court, yet we are aware that all we have said is not in accord with some of the views expressed by the members of the court in those cases where, from differences of opinion among them, no authoritative conclusion has been announced by a majority of the court. What we have said we believe to be justified by the decisions of that court and we feel satisfied that it is only just and right. The director has not been stinted in his rights and privileges by the course of judicial decision. He has been allowed to secure and hold on to rights which from the very necessity of his situation has given him an advantage, of position over other creditors. There is no reason why he should not be required to show, in the first instance, that he has obtained his preference in the proper way. There is no justice in permitting him the additional advantage by his own vote, in his own case, deciding that he should be preferred. He would not be human were he not, in such instance, blinded to the interest of the corporation, the stockholders and the other creditors. It is said, and it is admitted, that he has a right to race with other creditors for preference, but he ought not to be allowed to block the way of the others by his own act. The judgment is reversed and the cause remanded that the case may be heard as herein indicated. All concur.