Thompson v. . Shepherd
165 S.E. 796
N.C.
1932
Check Treatment
Clarkson, J.

We think the main exception and assignment of error, made by plaintiff and determinative of this controversy: Did the court below err in refusing plaintiff’s motion for a directed verdict at the close of all the evidence? We cannot so hold.

In Hill v. Lumber Co., 113 N. C., at p. 116, we find: “Neither can there be any doubt that the capital stock and property of the corporation, in case of its insolvency, constitute a fund, first for the satisfaction of its creditors, and next for the shareholders.”

The principle is thus stated in Wall v. Rothrock, 171 N. C., at p. 391: “There is no doubt that a board of directors, unless restricted by charter, may borrow money for the present needs of the corporation, and authorize certain directors to endorse the notes and secure them by mortgage on the corporate property, if done in good faith. . . . There is nothing to hinder a director from loaning money and taking liens on the corporate property to secure him. If he can do that, he can lend his credit by endorsing its paper in order to obtain needed cash, and secure himself upon the corporation’s property. Such transactions are looked upon with suspicion, and strict proof of their bona fides is required . . . but the directors, occupying a fiduciary relation, are not permitted to secure themselves against preexisting liabilities of the corporation upon which they are already bound, or for money they may have already loaned, when the corporation is in declining circumstances and verging on insolvency. (Italics ours.) They cannot be permitted to take advantage of their intimate knowledge of the corporation’s affairs for their own benefit at the expense of the general creditors.” Power Co. v. Mill Co., 154 N. C., 76; Pender v. Speight, 159 N. C., 612; Gilmore v. Smathers, 167 N. C., 444; Drug Co. v. Drug Co., 173 N. C., at p. 508; Redrying Co. v. Gurley, 197 N. C., at p. 61; Shuford v. Brown, 201 N. C., at p. 24.

It will be noted that the vice is when the transaction affects preexisting liabilities. In the present action when the matter complained of was consummated, there were no preexisting liabilities. The $4,000 note was made subsequent.

Thompson on Corporations, Supplement, 1931, part sec. 3685, at p. 610: “It is not illegal for a corporation to retire its stock if it has sufficient surplus so that the rights of its creditors will not be adversely affected.” N. C. Code, 1931 (Michie), C. S., 1161, 1179. See Pender's case, supra.

The matter germane to this action is succinctly stated, citing many decisions, in Thompson on Corporations, supra, part sec. 4081, p. 638: *315 “A purchase of its owu stock by a corporation must be free from fraud and must not prejudice the rights of creditors. . . . Generally the propriety and desirability of a purchase by a corporation of its stock should be determined by its directors rather than by the courts.”

The purchase must be free from fraud. On this aspect, the issue submitted was as follows: “Was the conveyance of the property described in paragraphs Nos. 6 and 12 of the complaint, by the Raleigh Roofing and Cornice Company to the defendant, S. Brown Shepherd, openly and fairly made, and for an adequate consideration?” To which the jury responded in the affirmative — Yes.

In Hospital v. Nicholson, 189 N. C., at p. 49, citing numerous authorities, speaking to the subject, it is said: “When an officer or director of a corporation purchases or leases its property, the transaction is voidable, not void, and will be sustained only when openly and fairly made for an adequate consideration. The presumption is against the validity of such contract and when it is attacked the purchaser or lessee must show that it is fair and free from oppression, imposition, and actual or constructive fraud. Firmly established in our jurisdiction is the doctrine that a person occupying a place of trust should not put himself in a position in which self-interest conflicts with any duty he owes to those for whom he acts; and as a general rule he will not be permitted to make a profit by purchasing or leasing the property of those toward whom he occupies a fiduciary relation without affirmatively showing full disclosure and fair dealing. Upon this principle it is held that a director who exercises a controlling influence over codirectors cannot defend a purchase by him of corporate property on the ground that his action was approved by them.” Mfg. Co. v. Bell, 193 N. C., 367; Cotton Mills v. Knitting Co., 194 N. C., 80; Morris v. Y. & B. Corp., 198 N. C., at p. 713.

The court below charged the jury in the very language of the Hospital case, supra. The court below further charged the jury: “No corporation has the right to reduce its capital stock except in the manner prescribed by the statute, and there is no evidence that in the transaction of April, 1925, this was done or attempted to be done. Capital stock may be decreased by the purchase of shares for retirement at not above par. Unless restrained by some provision of the charter, a corporation may purchase its own stock for sale or proper disposition of the same. Now the action here is for the purpose of declaring void and illegal the transfer of the property of the corporation to an officer of the corporation upon the ground that it was not fair, open and for a fair and adequate consideration. . . •. If you find that it was made openly, without concealment, and with full knowledge of the facts by the parties concerned, *316 fully disclosed, fairly and without taint of oppression, coercion, improper or undue influence, or undue advantage, in good faith and free from actual or constructive fraud, for a fair consideration, not necessarily the exact consideration to a nicety, but a fair and adequate consideration, for the conveyance was paid, and that it was openly and fairly made, if you find these are the facts by the greater weight of the evidence, answer the issue Yes, otherwise No.”

We do not think C. S., 1161 or 1179, N. C. Code, 1931, (Michie), applicable to the facts in this case, but the principle is well settled as stated in Ellington v. Supply Co., 196 N. C., at p. 789: “Corporations are artificial beings and are organized to do business in accordance with the statutory provisions of the law on the subject. The powers, rights, duties, and liabilities are fixed by statute and they are creatures of the law. Every one dealing with a corporation does so with the express or implied limitations imposed by statute.”

It seems from the record that all the stockholders — the three — were satisfied, they were the ones most vitally interested. The jury found there was no fraud, after a charge by the court below in which we find no error. The corporation had been in existence since 1 August, 1910, it purchased Shepherd’s stock in April, 1925, continued to function for years after until the business deflation of recent years, and on 10 December, 1929, it became bankrupt. There were no preexisting debts. In law we find

No error.