Rhea v. Newton

MUNGER, District Judge (after stating the facts as above). The chief question in the case is the sufficiency of the evidence to support the decree.' The evidence introduced on behalf of the Whitlocks tended to prove that Jacobs agreed with them that, if they would assign their stock to him as trustee for the creditors, he would put a competent manager in charge of the mine, and endeavor to pay off the corporate debts by the proceeds from the operation of the mine, and then would return the shares of stock to them. The theory of Whit-lock’s counsel is that this was as far as the agreement extended, and that no power of sale of the mine or of the stock was conferred on Jacobs or the bank, although this militates against the allegations of the bill. The case has been considered upon the evidence, as if the Whitlock bill conformed to this theory. Treating the evidence as proving the agreement of Jacobs to have been as Whitlocks’ counsel now contend, and conceding, without deciding, that thereby a trust [351] was created in the property of the corporation, and also in Whitlocks’ shares of stock, a question of fact arises as to what notice Rhea had of this trust agreement, binding him, as a purchaser of the corporate property, to account to Whitlocks. Conceding, also, without deciding, that the correspondence between Mrs. Newton’s attorney and Jacobs created a similar trust in her favor, a similar question of fact arises as to what notice, if any, Rhea had of the agreement between Mrs. Nervton and Jacobs, and, if Rhea had no notice, the Mont B. Mining Company cannot be said to have had notice. Rhea was held to account to plaintiffs only because he acquired the property of the Ananias corporation, and from that property he thereafter made profits. Its corporate existence was not continued by him after he acquired its property, and the property acquired was transferred from him to the Mont B. Mining Company. [ 1 ] Was there anything in the relationship of Rhea to the Ananias Company that invalidated his purchase of that company’s mining property ? • He was an employe of the corporation under a verbal contract to operate the mine experimentally, with a view to discovering whether it would be profitable, if operated. His dealings for the purchase of the mine were made with the company’s president, approved by the board of directors, and ratified by the holder of more than a majority of the issued capital stock. There is no reasonable question of his good faith toward the company in making his purchase. He did not in any manner represent the corporation in making the sale. That he was making the purchase for himself was not concealed, as the written contract named him as the vendee. The contract is shown to have been fair, and to the benefit of the corporation and of its stockholders. It provided for the payment of all of the debts of the corporation. There was no .apparent prospect of development of the mine of the Ananias Company so as to be profitable, but with additional land that Rhea could acquire the property, with its mill, would be of some advantage. It is urged that Rhea was incapacitated to purchase the property because of his office, but this contention cannot be sustained. In the case of Wyman v. Bowman, 127 Fed. 257, 62 C. C. A. 189, this court, by Judge Sanborn, stated the rule as follows: “In the first place, it is not true, as a general rule, that the directors of a corporation are incompetent to make contracts with themselves as individuals, or that agreements so made may generally he avoided at the suit of creditors or stockholders of the corporation. The only reason why a contract of this character may be sot aside in any case is because directors occupy a fiduciary relation to the corporation, and to its creditors and stockholders. This relation is analogous to that of agent to principal, and trustee to cestui que trust; but it is not of so intimate and confidential a character as either of these. Still it is such a relation of trust and confidence that courts scrutinize with jealous care all transactions between directors as officers and as individuals, and require them to be characterized by good faith and the conscientious discharge of official duty. The vice against which they seek to guard them is that the adverse interest of the individuals may overcome the duty of the officials, and induce agreements and transactions detrimental to the corporation, and unduly beneficial to the individuals. Yet in many — probably in most — cases the interest of the directors and officers of the corporation is as [352] great, and it is often greater, in tlie welfare and success of the company, than in their individual prosperity. In many cases the prosperity of the_ individuals is conditioned by the success of the corporation they are managing. There is no sound reason why individuals who are directors of a corporation may not come to its assistance in days of financial distress, may not make their contracts to loan money to it, to receive security from it for repayment, to accept payment of obligations to them, to buy property from, or sell property to, it, or to do any other act beneficial to the corporation, or mutually advantageous to both the corporation and the individuals. The question here under consideration has often been discussed and determined by the courts of this country and of England, and, without entering upon an exhaustive review of the opinions, it may be safely said that these principles have become firmly established both by reason and by authority: Contracts and transactions between individuals and corporations of which they are directors or officers, which are fair, which are made in good faith, which do not secure to the individuals any undue or unjust benefit or advantage, and in which the interest of the individuals and the duty of the officials work in unison for the welfare of the corporation, are valid and enforceable both at law and in equity. Twin Lick Oil Co. v. Marbury, 91 U. S. 587, 590, 23 L. Ed. 328; Hotel Co. v. Wade, 97 U. S. 13, 22, 23, 24 L. Ed. 917; Gould v. Railway Co. (C. C.) 52 Fed. 680, 681; Sutton Mfg. Co. v. Hutchinson, 63 Fed. 496, 11 C. C. A. 320; Holt v. Bennett, 146 Mass. 437 [16 N. E. 5]; Smith v. Lansing, 22 N. Y. 520, 528; Duncomb v. N. Y., etc., R. Co., 88 N. Y. 1, 6, 9; Buell v. Buckingham & Co., 16 Iowa, 284, 291, 293 [85 Am. Dec. 516]; Ashurst’s Appeal, 60 Pa. 291, 312, 315; Hallam v. Indianola Hotel Co., 56 Iowa, 178, 9 N. W. 111; Combination Trust Co. v. Weed (C. C.) 2 Fed. 24. 25-27; Gorder v. Plattsmouth Canning Co., 36 Neb. 548, 556, 54 N. W. 830.” Later cases have approved the same rule. Union Trust Co. of Maryland v. Carter (C. C.) 139 Fed. 717; Kessler & Co. v. Ensley Co. (C. C.) 141 Fed. 130; Cowell v. M’Millin, 177 Fed. 25, 100 C. C. A. 443; Howland v. Corn, 232 Fed. 35, 146 C. C. A. 227; In re Eastman Oil Co. (D. C.) 238 Fed. 416. [2] It is also urged that Rhea had notice of the trust relationship! between Whitlocks and Mrs. Newton and Jacobs. Rhea denies any knowledge of the contracts claimed by plaintiffs to have existed. Rhea had assigned his stock without conditions, although Jacobs’ letter to Mrs. Newton’s attorney stated otherwise. Rhea mistakenly considered that the corporate property had to be conveyed by a judicial sale before he could get a clear title, because Webster had not assigned his stock. Rhea did not see or know of the correspondence between Jacobs and Mrs. Newton’s attorneys, tie did not know that any of tire stock was assigned on any conditidn, except that it was for the purpose of paying the corporate debts. Without stating the details of evidence relied upon by the appellants and appellees, a careful reading and consideration of all the evidence, and a comparison of it with the contentions made as to its legal effect, leaves the conviction that Rhea was a purchaser of the corporate property in good faith and without notice of any trusteeship by Jacobs as now claimed by appellees, and that the Mont B. Mining Company acquired the property from him, also in good faith and without notice of any right therein claimed by appellees. [3, 4] Rhea dealt with those who were at least de facto officers. No other persons claimed to act as directors or president. The officers were recognized as such by all who had dealings with the corporation, and plaintiff’s counsel conceded at the trial that the cred [353] itors had the right to choose a new board of directors to manage the property. The acts of de facto officers in good faith are as valid as resnects third persons as are those of de jure officers. 3 Cook on Corps. (7th Ed.) § 713; 2 Thomp. on Corps. (2d Ed.) §§ 1117-1120; Augusta T. & G. R. Co. v. Kittel, 52 Fed. 63, 2 C. C. A. 615. When a corporation is insolvent, and unable to meet its obligations, or to secure further funds with which to continue business,' and creditors are pressing their claims, a majority of the stockholders have the power, in good faith, to make a sale of the entire corporate property in order to provide [or such debts. 3 Cook on Corps. (7th Ed.) § 670 ; 3 Thomp. on Corps. (2d Ed.) § 2724; Hayden v. Official Hotel Red Book & Directory Co. (C. C.) 42 Fed. 875; Marks v. Merrill Paper Co., 203 Fed. 16, 123 C. C. A. 380; Skinner v. Smith, 134 N. Y. 240, 31 N. E. 911; Sewell v. East Cape May Beach Co., 50 N. J.. Eq. 717, 25 Atl. 929; Phillips v. Providence Steam Engine Co., 21 R. I. 302, 43 Atl. 598, 45 L. R. A. 560; Rothwell v. Robinson, 44 Minn. 538, 47 N. W. 255; Bowditch v. Jackson Co., 76 N. H. 351, 82 Atl. 1014; Sawyer v. Dubuque Printing Co., 77 Iowa, 242, 42 N. W. 300; Price v. Holcomb, 89 Iowa, 123, 56 N. W. 407; Traer v. Lucas Prospecting Co., 124 Iowa, 107, 99 N. W. 290; Treadwell v. Mnfg. Co., 7 Gray (Mass.) 393, 66 Am. Dec. 490; Descombes v. Wood, 91 Mo. 196, 4 S. W. 82, 60 Am. Rep. 239; Common Sense Min. & Mill. Co. v. Taylor, 247 Mo. 1, 152 S. W. 5; Jones on Insolvent Corporations, § 56; Purdy’s Beach on Corporations, §§ 830-834. Rhea purchased this property from the stockholders and board of directors; both they and he acting in good faith, and believing that authority existed for the making of the conveyance, and that it was for the best interests of the corporation and of the creditors that the property should be sold. No other opportunity had been found to dispose of it, and the price was fair. Rhea was justified in believing that the other stockholders who had assigned their stock had made such transfer on the same terms that he had, as a surrender of their office and a surrender of the shares of stock to the creditors, so that they might obtain payment of their claims, either by operation of the mines or by sale of the mining property. As nothing impugns his good faith in making the purchase from the directors and holder of the majority of the stock, neither he nor the Mont B. Mining Company can be held to be a trustee for plaintiffs. These conclusions render unnecessary a discussion of other questions presented. For the reason stated, the decree will be reversed, with instructions to dismiss the suits. CARLAND, Circuit Judge, dissents.