following its lead, it is common for the courts to apply to directors the statutory rules governing trustees in general.13

§ 2264. - Double character of agent and trustee. The rule, as stated by Mr. Pomeroy, is that "directors are clothed at the same time with a double character-that of quasi trustees and that of agents. "14 It has been held that as to third persons, directors are the agents of the corporation, but as to the corporation itself, equity holds them liable as trustees.15 In referring to the early English case of Charitable Corporation v. Sutton,16 a magazine writer has called attention to the fact that that case referred to the director as an agent and also as a trustee, and that "courts have continued to do the same thing down to the present day and have never been able to say whether a director's duty should be judged by that of an agent or by that of a trustee. This is not the fault of the courts but is due in large measure to the fact that a director in some situations stands in the relation of agent to principal and in others in the relation of trustee to cestui. He has characteristics common to both but often stands in a position differing from either. Agents usually receive a direct consideration or compensation for their services while directors usually do not. Trustees have no interest in the subject-matter of the

13 Pacific Vinegar & Pickle Works v. Smith, 145 Cal. 352, 104 Am. St. Rep. 42, 78 Pac. 550; Schnittger v. Old Home Consol. Min. Co., 144 Cal. 603, 78 Pac. 9; Fowler v. Iowa Land Co., 18 S. D. 131, 99 N. W. 1095, applying Civ. Code S. D. § 1641, providing that trustee cannot enforce any claim against the trust property which he may acquire after his appointment as trustee.

143 Pomeroy's Equity Juris. (3rd Ed.), § 1089.

15 Continental Securities Co. v. Belmont, 206 N. Y. 7, 16, 51 L. R. A. (N. S.) 112, Ann. Cas. 1914 A 777, 99 N. E. 138; Bosworth v. Allen, 168 N. Y. 157, 55 L. R. A. 751, 85 Am. St. Rep. 667, 61 N. E. 163.

"Directors are the agents of the corporation in its dealings with third persons, but they are trustees in relation to the corporation for they hold its property and are charged with the

duty of using, managing, and expending it in its business and for its benefit." Gray v. Heinze, 82 N. Y. Misc. 618, 144 N. Y. Supp. 1045.

The liability of directors and other officers to the corporation for mismanagement is determined by substantially the same principles which determine the liability of any other agent to his principal for failure to perform the duties which he has undertaken. "The liability of officers to the corporation for damages caused by negligent or unauthorized acts rests upon the common-law rule which renders every agent liable who violates his authority or neglects his duty to the damage of his principal.” Pinney J., in North Hudson Mut. Building & Loan Ass'n v. Childs, 82 Wis. 460, 33 Am. St. Rep. 57, 52 N. W. 600.

16 2 Atk. 400, 405, 26 Eng. Rep. 642.

trust while directors usually have a very substantial interest as stockholders in the property of the corporation. For this reason the problem cannot be solved by relying entirely upon analogies as the courts seem inclined to do but must be worked out upon a somewhat independent basis." 17

§ 2265. As dependent on whether court one of law or equity. It has been said that "while courts of law generally treat the directors as agents, courts of equity treat them as trustees, and hold them to a strict account for any breach of the trust relation. For all practical purposes they are trustees when called upon in equity to account. for their official conduct." 18 In other words, when directors or other corporate officers are sought to be held liable in a suit by the corporation, the remedy is generally in equity on the theory that the officers are at least quasi trustees and so liable in equity for a breach of trust.19 On the other hand, if officers are sought to be held liable by creditors of the corporation or persons dealing with the corporation, rather than by the corporation itself, the action is generally at law instead of in equity,20 and the liability is generally determined according to the rules of agency, i. e., the liability of an agent to third persons.21

§ 2266. Classification as agent or as trustee not exclusive. It was said in an English decision that when directors are spoken of by the courts as "agents, trustees, or managing partners of the company, it is essential to recollect that such expressions are not used as exhaustive of the powers or responsibilities of those persons, but only as indicating useful points of view from which they may for the moment and for the particular purpose be considered-points of view at which they seem for the moment to be either cutting the circle or falling within the category of the suggested kind. It is not meant that they belong to the category but that it is useful for the purpose of the moment to observe that they fall pro tanto within the principles which govern that particular class. Directors are not exactly agents nor exactly servants-perhaps not servants at all-nor exactly trustees, nor exactly managing partners, if by that is meant that they are nothing more and nothing else."' 22

17 Article by M. C. Lynch in 3 Cal. Law Rev. 21, 22.

18 Bosworth v. Allen, 168 N. Y. 157, 55 L. R. A. 751, 85 Am. St. Rep. 667, 61 N. E. 163.

*

*

19 See § 2671, infra.

20 See § 2673, infra.

21 See also § 2264, supra.

22 Imperial Hydropathic Hotel Co. v. Hampson, 23 Ch. Div. 1, 12.

§ 2267.- Importance of determining whether officer a trustee or an agent. However, as has been said, it is doubtlessly true, at least under most circumstances, that it is immaterial whether directors be treated as trustees in the full sense of that term or as agents.23 In a recent case in Georgia, Justice Lumpkin ably sums up the situation as follows: "Directors of a private corporation occupy a somewhat peculiar position. They have been variously classified as agents, mandataries, bailees and trustees; and it has been sought to define their duties and liabilities to the corporation and its stockholders on the basis of such relations. A great deal of learning has been expended, and perhaps some of it wasted, in efforts to rigidly apply one or another of these analogies to facts to which it has not always been fully applicable. Directors are agents, but they are also agents clothed with a fiduciary character; and, while they are not express or technical trustees, they are selected to manage the affairs and property of the corporation for its benefit, and they bear to it and to its stockholders a relation which in many respects may be called a trust relation; and thus by numerous courts they have been called trustees.'

§ 2268. Rule as different where officer is one other than a director. Although directors may be considered to be trustees, other officers of the corporation, especially those appointed by the board of directors and who devote all or a large portion of their time to the corporate affairs and who are paid a salary, are more properly considered as agents of the corporation.

§ 2269. - Review of situation. A few cases have considered at some length whether a director occupied the position of trustee or of agent, but the most of the decisions, especially the later ones, merely state in so many words that he is a trustee, or is an agent, or that he is both a trustee and agent, without further consideration of the subject and merely as dicta. It is unfortunate, to say the least, that the courts should ever have attempted to classify directors either as trustees or as agents or both. It would have been much better to have worked out the rules governing their duties and liabilities according to the nature of the particular office and the nature of the particular duty or liability involved, without regard to the rules either of trust or agency, except by analogy. The true rule is believed to be this. A director, strictly speaking, is neither a trustee nor an

23 Coombs v. Barker, 31 Mont. 526, 79 Pac. 1.

24 McEwen v. Kelly, 140 Ga. 720, 79 S. E. 777.

agent: He resembles both. In some respects the rules relating to trustees are applicable to him and in some respects they are not applicable to him. In some respects the rules applicable to agents are applicable to him, and in some respects such rules are not applicable to him. Whether, in a given case, the rule applicable to trustees or the rule applicable to agents, or neither of such rules, is applicable, is determinable by no fixed rule, but depends almost entirely upon the nature of the particular act or contract which is the subject of the controversy. The following statement of a prominent textbook writer is quoted with approval: "The position of directors has been variously designated and described. Thus, they have been called agents; and they certainly are for some purposes agents of the corporation. They have also been called 'managing partners'; but as they are obviously not partners at all, the phrase is helpful only by analogy. Again, they have been called 'trustees.' But as a trustee is one who holds the title to property for the benefit of another, and as directors are not invested with the title to the corporate property, the inaccuracy of the appellation is apparent. The truth is that the status of director and corporation is a distinct legal relationship. It resembles in some respects those of agent and principal, of managing and dormant partners, of trustee and cestui que trust; but it is different from each." 25

§ 2270. Relation to individual stockholders. Sometimes it is said that a director or other managing officer is a trustee in so far as the corporation and its stockholders are concerned, and sometimes it is said that he is a trustee only as to the corporation itself. However, the better rule seems to be that he is a trustee for an individual stockholder, as well as the corporation, at least in a limited sense.26 Thus,

25 2 Machen, Corporations, § 1399. 26 Jackson v. Ludeling, 21 Wall. (U. S.) 616, 22 L. Ed. 492; Stewart v. Harris, 69 Kan. 498, 66 L. R. A. 261, 105 Am. St. Rep. 178, 2 Ann. Cas. 873, 77 Pac. 277; Sargent v. Kansas Midland R. Co., 48 Kan. 672, 688, 29 Pac. 1063; Black v. Simpson, 94 S. C. 312, 46 L. R. A. (N. S.) 137, 77 S. E. 1023.

"The board of directors, therefore, occupies a dual relation in reference to the stockholder. It is both agent and adversary. It represents and it antagonizes. It protects and it as

sails. In the conduct of the corporate enterprise, in choosing methods, in fixing policies, and administering affairs, the board must be held to act on behalf of the stockholder. It represents him. The determination of the extent to which the capital stock shall be embarked falls naturally within the province of those who are charged with the prosecution and success of the undertaking; and in exercising the power vested in it by law, or by contract, to fix the time and amount of stock calls, the board in a just and proper sense represents the

Justice Lamar, in a Georgia decision, said that the fact that a director is a trustee for all the stockholders "is not to be perverted into holding that he is under no obligation to each. The fact that he must serve the company does not warrant him in becoming the active and successful opponent of an individual stockholder with reference to the latter's undivided interest in the very property committed to the director's care. That he is primarily trustee for the corporation is not intended to make the artificial entity a fetich to be worshipped in the sacrifice of those who, in the last analysis, are the real parties at interest. No process of reasoning and no amount of argument can destroy the fact that the director is, in a most important and legitimate sense, trustee for the stockholder. Not a strict trus

tee, for he does not hold title to the shares, not even a strict trustee who is practically prohibited from dealing with his cestui que trust; but a quasi trustee as to the shareholder's interest in the shares.'" 27 This view is the one enunciated by Mr. Pomeroy who, however, excludes from such trust the corporate property itself.28 In many jurisdictions, however, it is held that directors are not trustees as to shares of stock held by individual stockholders. 29 Thus, in Illinois, it is said that "the officers of a corporation are trustees for the stockholders as a body with respect to the business and property of the corporation, which is under their control and management for the benefit of stockholders generally; but an officer has no control over the shares of the individual stockholder and is not a trustee for such stockholder with respect to his stock." "30

This question usually arises in connection with purchases of stock by a director or the like, from a shareholder, all of which is considered hereafter.31

stockholder, as it does in other matters involving judgment and discretion." West v. Topeka Sav. Bank, 66 Kan. 524, 528, 63 L. R. A. 137, 97 Am. St. Rep. 385, 72 Pac. 252.

27 Oliver v. Oliver, 118 Ga. 362, 367, 45 S. E. 232.

28So far as the trust embraces or is concerned with the corporate property, the directors and managing officers occupy the position of quasi trustees towards the corporation only; there is no relation of beneficiary and trustee, having the corporate property for its subject-matter, between the

3

stockholders and the directors." Pomeroy's Equity Jurisprudence (3rd) Ed.), § 1090.

29 Board Com'rs of Tippecanoe County v. Reynolds, 44 Ind. 509, 15 Am. Rep. 245; Smith v. Hurd, 12 Metc. (Mass.) 371, 46 Am. Dec. 690; Crowell v. Jackson, 53 N. J. L. 656, 23 Atl. 426; Haarstick v. Fox, 9 Utah 110, 33 Pac. 251.

30 Bawden v. Taylor, 254 Ill. 464, 98 N. E. 941, following Hooker v. Midland Steel Co., 215 Ill. 444, 106 Am. St. Rep. 170, 74 N. E. 445. 31 See § 2564, infra.