113 P. 295 | Mont. | 1911
delivered the opinion of the court.
Without reciting in detail the history of the Eglanol Mining Company, it is sufficient to say that in November, 1902, it was a corporation organized under the laws of this state, with a capital stock of $200,000, represented by 200,000 shares, of the par value of one dollar each. The property of the company consisted of placer mining claims, tools, machinery and other property used in connection with placer mining operations. In 1903 the owners of a majority of the stock formed a pool of their stock and placed it in the hands of B. H. Tatem, as trustee for the real owners. In 1904 the property had not been sufficiently developed to be operated successfully and profitably. The company was without funds and had outstanding debts amounting to about $4,700. A proposition was made to the minority stockholders that, if they would loan to the company $20,000 to discharge its indebtedness and prosecute development work, a first mortgage on all the property of the company would be
1. The first error assigned relates to the exclusion from evidence of the notes sued upon, and the question for determination is: Were those notes void under the facts disclosed by the pleadings! In March, 1904, this company was in debt. Its property was subject to seizure and sale at the instance of its creditors. The company was without funds to pay its indebtedness or protect its property. Money was necessary to prosecute development work. In addition to these facts—which are not disputed—let us assume the additional facts: (a) That the-board of directors had made every reasonable effort to borrow money from persons who were not directors, and had failed;, (b) that the property was in actual jeopardy of being seized by creditors; (c) that Chessman, Edgerton, and Tatem, and-others who were stockholders but not directors, were willing each: to advance a portion of the money necessary, and that the aggregate of these amounts equaled the sum necessary to be.raised;, (d) that each of the persons just mentioned contributed the-amount which he was willing to advance to a common fund to be loaned to the company upon its promissory notes; (e) that the' loan was made, but, for the purpose of convenience, the notes were taken in the name of Tatem, as trustee for all who contributed to the fund; and (f) that by reason of getting this loan the company rescued its property from the burden of debt and developed it into an immensely valuable property, with the result that the shares of stock were greatly enhanced in value. Upon this statement of actual and assumed facts, would these interveners be heard to say that these notes are void by reason of the fact that Tatem, with Chessman and Edgerton, for whom he
Furthermore, it is immaterial to the determination of this question that one contributor to this fund was the wife of Chessman, or that another was the wife of Edgerton, or that the shares owned by Mrs. Chessman and Mrs. Edgerton, who were members of the pool, were necessary to control the- stock, or that Tatem in his own right owned a majority of the stock in the pool. Certainly there is not anything in the law to prevent a married woman owning stock in a private corporation, and in this day of advanced thought and action it would not do to suggest that the separate property of a married woman is controlled by her husband merely because of the relationship of husband and wife.
In March, 1904, when it became necessary for this company to raise funds, Chessman, Edgerton, Tatem, Mrs. Chessman, Mrs. Edgerton, and others whose names are not disclosed by the record, each contributed a sum of money which in the aggregate amounted to $23,400, and loaned it to the company, of which Chessman, Edgerton, and Tatem constituted a majority of the board of directors, talcing the notes of the company in the name of Tatem as trustee. It would be a rather startling prop
In Savage v. Madelia Farmers’ Warehouse Co., 98 Minn. 343, 108 N. W. 296, the supreme court of Minnesota said: “Direct
In Wyman v. Bowman, 127 Fed. 257, 62 C. C. A. 189, there is a very learned discussion of the question now before us, by the circuit court of appeals of the eighth circuit. In the course of the opinion it is said: ‘ ‘ Concede for the moment that the directors were not competent to make the contract for themselves, and that they received a preference over the other creditors. Nevertheless their contract and transaction was not void, it was voidable only, and voidable at the option of the creditors or the stockholders of the company. Neither the creditors, nor the corporation, nor the stockholders, could take and keep the benefit of the •contract and transaction, and repudiate its burdens. The transaction was valid until avoided, not void until confirmed. * * *' 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 be avoided at the suit of the creditors or stockholders of the corporation. The only reason why a contract of this character may be set aside in any case is because directors occupy a fiduciary relation to the corporation, its creditors, and stockholders. The 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 is that the adverse interest of
In Twin Lick Oil Co. v. Marbury, 91 U. S. 587, 23 L. Ed. 328, the supreme court of the United States said: ‘ ‘ That a director of a joint stock corporation occupies one of those fiduciary relations where his dealings with the subject matter of his trust or agency, and with the beneficiary or party whose interest is confided to his care, is viewed with jealousy by the courts, and may be set aside on slight grounds, is a doctrine founded on the soundest morality, and which has received the clearest recognition in this court and others. (Koehler v. Black River Falls
In 3 Clark and Marshall on Private Corporations, section 760, it is said: “All the authorities agree that the majority of the directors must be disinterested in respect to the matters voted upon. If one or more of them are personally interested in a contract or other transaction voted upon by the board, and less
In 3 Thompson’s Commentaries on the Law of Corporations, section 468, the learned author says: “The strict rule that directors cannot enter into contracts with the corporation does not seem to be practicable. It would operate to disable those who have already embarked their funds in a corporate enterprise and given to it their personal attention, from assisting it in time of difficulty, except at the risk of doing so without security. A corporation might be in a sorry plight indeed if one who had already embarked his funds in it, and who, from the fact of his being one of its managers, is best acquainted with its needs and difficulties, should not be able to make a present advance of money to it to help it out of those difficulties. That it is necessary for the law to throw around such transactions the strongest safeguards in order to prevent fraud need not be argued. * * * We therefore find the prevailing doctrine to be that the director of a corporation may advance money to it, may become its creditor, may take from it a mortgage or other security, and may enforce the same like any other creditor—but always subject to severe scrutiny, and under the obligation of acting in the utmost good faith.”
In treating of the relationship of directors of a corporation to the company itself and to its stockholders, the supreme court of California has applied the statutory rules governing a trustee and cestui que trust. (Cal. Civ. Code, secs. 2228, 2230-2234; Mont. Rev. Codes, secs. 5374, 5379, 5380.) We doubt the propriety of this holding so far as applied to the directors of a going concern, but the result of the California court’s holding is not different from that of the majority of the courts, as indicated in the cases cited above. In Phillips v. Sanger Lumber
In Schnittger v. Old Home Con. Min. Co., 144 Cal. 603, 78 Pac. 9, the same court said: “A director of a corporation, like any other trustee, is bound to act in the utmost good faith toward his beneficiary (Civ. Code, sec. 2228), and is forbidden to take part in any transaction concerning the trust in which he has an interest adverse to that of his beneficiary (Civ. Code, sec. 2230); but he is not absolutely precluded from dealing •directly with the corporation of which he is a director. Any transaction between them is subject to rigid scrutiny, and is voidable at the instance of the beneficiary for any violation of his duty as trustee, but is not ipso facto void.”
"While there is some apparent conflict in the California decisions, it arises, doubtless, from a somewhat indiscriminate use of the terms “void,” “voidable,” and “illegal.” In Pacific Vinegar & Pickle Works v. Smith, 145 Cal. 352, 104 Am. St. Rep. 42, 78 Pac. 550, there is a review of the former decisions, and the court rather loosely expresses itself as follows: “These are all the cases from this court cited by counsel, and none of them run counter to, but clearly recognize the distinction between, eases where the director deals with the corporation, or
The decision of this court in Gerry v. Bismarck Bank, 19 Mont. 191, 47 Pac. 810, is not in conflict with the views herein expressed. In that ease this court was considering the question of actual fraud which Bannister and Child, two of the directors of the Bannister Mining Company, perpetrated upon the stockholders and the company.
Reason and the decided weight of authority lead us to the conclusion that the notes sued on in this present action are not illegal or void.
2. Did the exclusion of the notes prejudicially affect the interest of plaintiff? In 10 Cyc. 812, it is said: “So far from a contract between the director and the corporation being void ab initio, the law is that in the absence of fraud such a contract is enforceable in an action at law.” In 3 Thompson on Corporations, section 4067, the same rule is stated as follows: “A conception which illustrates the incongruity of a system of judicial administration, in which a contract may be either good or bad according to the form of action or kind of remedy, is involved in'the proposition that such a contract is good at law; the director and the corporation being different persons in theory and fiction of law, and not a partner and his firm. Under this theory, if the director enters intoy a contract with the corporation, whereby he is to do something for the corporation for a reward, and executes the contract, he is entitled to sue the corporation on the contract and recover the agreed price.’' In other words, in this action at law to enforce payment of these notes, the production of the notes by the plaintiff made out his pnma facie case, and the burden of proof was upon the interveners to show such a state of facts, if any existed, as would defeat the plaintiff’s right to recover. When, however, the notes were excluded, and plaintiff was forced to reply upon the common counts, a very much greater burden was imposed upon him.
Reversed and remanded.