borrowed money from its directors and secretary, and being in need of funds for its business, negotiated its note, secured by a conveyance of all its property, and with part of the proceeds paid the loans to its directors and secretary, and with the balance bought material and defrayed legitimate expenses. Subsequently its property was sold for its full market value, and the proceeds applied, as far as they went, to the payment of the note. It was

held, that as all the transactions were in good faith and in the due course of business, a creditor whose debt had not been paid had no claim on the directors individually for the payment of it. The mere fact that one of the directors was interested in a purchase made by a corporation will not avoid the purchase, no damage appearing to have resulted to the shareholder making the complaint. In England, under the Companies' Clauses Act of 1845,8 if a director is interested in a contract with the company, while the contract is not void, he will be disqualified to act as director. But where a contract between a corporation and one of its directors was made in the form of a resolution, to pass which the director was obliged to cast his vote, the contract was held invalid. 10

1 Knowles v. Duffy, 40 Hun, 485; Budd v. Walla Walla etc. Co. 2 Wash. 347; Santa Cruz R. R. Co. v. Spreckles, 65 Cal. 193; Hill v. Nisbet, 100 In l. 341.

2 Santa Cruz R. R. Co. v. Spreckles, 65 Cal. 193.

3 Saltmarsh v. Spaulding (Mass. 1888), 4 R'y & Corp. Law J. 151, 153, cit'n; Twin Lick Oil Co. v. Marbury, 91 U. S. 587; Holt v. Bennett, 143 Mass. 43; McMurtry v. Montgomery etc. Co. 81 Ky. 482; Santa Cruz R. R. Co. v. Spreckies, 65 Cal. 193.

4 McMurtry v. Montgomery etc. Co. 84 Ky. 462.

5 Saltmarsh v. Spaulding, 147 Mass. 224; 4 R'y & Corp. Law J. 151; Holt v. Bennett (1888), 146 Mass. 437.

6 Holt v. Bennett, 146 Mass. 437. 7 Hill v. Nisbet, 100 Ind. 341.

8 8 Vict. ch. 16. §§ 85, 86.

9 Foster v. Oxford etc. R'y Co. 13 Com. B. 200; S. C. 22 Law J. Com. B. 93; 8. C. 17 Jur. 167; Brown & Theobald's Railway Law, 102,

10 Bennett v. St. Louis Car Roofing Co. 19 Mo. App. 343. Cf. Reilly v. Oglesbay, 25 W. Va. 36, a case in which, the corporation having no directes, te stockholders acted in that capacity, and a sale of property to a stockholder ordered at a meeting from which s me of the stockholders were absent, was held voidable, although a reasonable price had been paid.

4

§ 478. Of loans made by the directors to the corporation.-Directors may end money to the corporation only upon terms as favorable as the most favorable upon which it could borrow from other;1 and only when they honestly believe it to be for the interest of the company to borrow. A director of a corporation, on a mortgage taken as security for notes given him by the corporation on money advanced by him, cannot recover excessive interest stipulated for, nor an amount included therein beyond the sum which he advanced. A director who has lent money to his company may take its property as security, and upon failure to pay, he may buy it in at a public foreclosure sale; and thi, is true whether the pledge be taken for a present or precedent debt. But although a director may be come a creditor of his corporation and take and foreclose a mortgage upon its property; yet he mu t act with the utmost good faith toward the corporation throughout the transaction. He cannot divest himself of the duty which he owes to the corporation as its director. In case of the insolvency of a corporation, there is no power in its directors or officers to mortgage or convey the corporate property to themselves, or to secure to themselves a preference. An assignee of a claim held by a director against his company, has no superior equities to those of the director himself.

th

1

1 Twin Lick Oil Co. v. Marbury, 91 U. S. 537; Sutter St. R. R. Co. v. Baum, 63 Cal. 44; Campbell's Case, 4 Ch. Div. 470.

2 Harts v Brown, 77 Ill. 226.

3 Sutter St. R. R. Co. v. Baum, 66 Cal. 44.

4 Twin Lick Oil Co. v. Marbury, 91 U. S. 587; Duncomb v. New York etc. R. R. Co. 83 N. Y. 1; S. C. 84 N. Y. 190, where the security taken was the bonds of the company at ten cents on the dollar: Saltmarsh v. Saulding (Mass. 1888), 4 Ry. & Corp. Law J. 151, 153.

5 Duncomb v. New York etc. R. R. Co. 84 N. Y. 190, 199; S. C. 88 N. Y. 1.

6 Hallam v. Indianola Hotel Co. 55 Iowa, 178; S. C. Am. Law Reg. July, 1882, and note by Adelbert Hamilton.

7 Haywood v. Lincoln Lumber Co. 64 Wis. 639.

8 Hunting v. Sweet, 33 Kan. 244.

$479. Of secret profits by directors in dealings with the corporation. For all secret profits in any dealing between a director and the corporation, he must account to the corporation, although it may have profited by the transaction.1 He cannot sell

rule, directors and offi

property to the corporation at an advance upon the
price paid by him, where he has purchased it with
that end in view, and nothing has been done in the
meanwhile to enhance the value of the property.
For fraud is presumed as a matter of law if it be
shown that the director has acquired secret profits
in any dealing with the
Company.3 As a general
against it at a disco cers cannot buy up claims
unt, and then prove them at
and for all on the winding up of the company;*
accountablir profits so realized they will be held
holders.se to the corporate creditors and share-
againsta
But a director may enforce a claim
another his company which he has purchased from
A dier, provided he seek to derive no secret profit."
larte firector who buys the bonds of his
33,w par does so at the peril of their avoidance by
the courts at the suit of the corporation."

their face value

company

be

So

where directors purchase from themselves stock at one-third its par value, the corporation and its creditors may hold them for the full value of the stock so procured. Where the president of a packet company made a contract in his own behalf with the United States government for the carriage of the mails, and used the boats of the company for that purpose, it was held that he should not be allowed to make any profit out of the use of the company's boats, but must account to it for all that he received for the service performed by them." But where a director purchases in good faith, at a foreclosure sale, property of the corporation which has been mortgaged by a vote of the directors, he does not necessarily hold the purchased property in trust for the corporation;10 and if afterwards by his energy and skill the property becomes more valuable, he cannot be required to account to the company for the increased value11 So, also, if the transaction be in good faith, a director may validly sell to the company property in which he has an interest, or of which he may be the sole owner, provided the property b of a kind which the company is authorized to pur chase, and which as a matter of fact it needs, for the purposes of its incorporation. 12

te Banks v. Simcns,

1 Bent v. Priest, 10 Mo. App. 543; Greenfield Saving can et. R'y Co. 133 Mass. 415; Parker v. Nickerson, 112 Mass. 195; Euroc. v. Colet an, v. Poor, 5) Me. 195. See Imperial Mercantile Credit Asso Law R. GH. L. 189; 2 Lindley on Partnerships, 538, 539.

nfra.

v. Priest,

2 Benson v. Heathorne, 1 Younge & C. 326, and cases cited 3 Duncomb v. New York etc. R. R. Co. 81 N. Y. 190; Bent Stewart 10 Mo. App. 513; Greenfield Savings Banks v. Simons, 133 Mass. 185 v. Lehigh Valley R. R. Co. 33 N. J. 505; Flint v. Dewey, 11 Mier Cook v. Berlin Woolen Mills Co. 43 Wis. 433; Davone v. Fanning, 2 JC Ch. 252.

477; hs.

4 Taylor on Corporations, § 633; Lingle v. National Ins. Co. 45 Mo 103; Thomas v. Sweet, 37 Kan. 133; Lx parto Larkin, 4 Ch. Div. 5.6.

he

ch

14

nt

5 Thomas v. Sweet, 37 Kan. 183.

6 Pacific R. R. v. Ketchum, 101 U. S. 289; Smith v. Lansing, 22 N. Y. 520; Kitchen v. St. Louis etc. R'y Co. 69 Mo. 221; Merrick v. Peru Coal Co. 61 I. 472; Seeley v. San Jose Mill Co. 53 Cal. 22; Sullivan v. Triunfo Mining Co. 3) C. 459.

7 Taylor on Corporations, § 633; Duncomb v. New York etc. R. R. Co. 84 N. Y. 193.

8 Freeman v. Stine, 15 Phila. 37.

9 Clubb v. Davidson (Mo.), 4 R'y & Corp. Law J. 161.

10 Siltmarsh v. Spaulding, 147 Mass. 224; 4 R'y & Corp. Law J. 151. Acc. Hacock v. Holbrook (1933), 40 a. An. 53. Cf. County Court v. Baltimore etc. R. R. Co. (1888) 35 Fed. Rep. 151.

11 Twin Lick Oil Co. v. Marbury, 91 U. S. 597, where the sale was to repay money lent by the director himself to the corporation; Addison v. Lewis, 75 Va. 701, 720; Harts v. Brown, 77 Iil. 223. Cf. Seely v. San Jose Mill Co. 59 Cal. 22.

12 Knowles v. Duffy. 40 Hun, 485, where the whole capital stock was paid for the property, and it was held not to be a fraud upon corporate creditors.

3

§ 480. Of the company's election to avoid or enforce transactions with directors.-While directors and corporate officers cannot bind the company upon a contract with themselves,' or in which they are personally interested; and while the company may within a reasonable time avoid any contract between itself and its officers, recovering damages from them therefor, yet it may, if it so elect, hold them to it, and compel them to account for any profits derived therefrom. For a company may enforce a contract entered into between it and a director, even when on account of his fiduciary relation to the company, he could not himself enforce it.5 But it cannot avoid in part, and in pat adopt an improper transaction with its directors or officers. And it may lose its right to repudiate the transaction by laches."

6

1 Coleman v. Second Ave. R. R. Co. 33 N. Y. 301; Guild v. Parker, 43 N. J. 43); Port v. Russell, 36 Ind. 63; 10 Am. Rep. 5; First National Bank V. Giford, 47 Iowa, 575; First National Bank v. Drake, 29 Kan. 311; Chamberlain v. Pacific Wool Growers Co. 51 Cal. 103; Ex rarte Hill, 32 Law J. Eq. 154. See Butts v. Wool, 37 N. Y 317;

ag, 2 Jiurray v. Van lerbilt, 39 Barb, 140; Abbot v. American Hard Rubber Co.

Co. 45 Mo

5.6.

Darb. 578; Munson v. Syracuse etc. R'y Co. 23 Hun, 73; Rhodes v.