§ 2271. Relation to creditors. Directors are not wholly without duties to creditors,32 but the decisions are in conflict as to whether a director is a trustee for creditors of the corporation, even where it is conceded that he is a trustee for the corporation itself. In a few states it has been held that directors are trustees for creditors, 33 at least in case of directors of a bank in favor of depositors.34 In other states the contrary is held.35 In a leading case in Minnesota, Justice Mitchell stated what he considered the rule to be, as follows: "Again, the directors of a corporation are not in any contractual relation with its creditors. They are strangers to each other. The creditors have no cause of complaint on account of any unlawful act of corporate officers, provided sufficient assets remain to pay their claims. Of course, as in case of any other persons, strangers to each other, directors would be liable at common law or equity to make just compensation for any wrong done to the legal rights of creditors. For example, if they misappropriate any part of the capital stock (which, in America, is held to be a trust fund for creditors), they might be held liable as trustees to the extent necessary to pay the debts; and, as in the case of liability to the corporation, the limit of the liability would be the amount of resultant damage. 36 It is a general rule, however, that when the corporation becomes insolvent, the directors are thereafter considered as trustees for the 32 McEwen v. Kelly, 140 Ga. 720, 79 S. E. 777. 33 Savings Bank of Louisville's Assignee v. Caperton, 87 Ky. 306, 12 Am. St. Rep. 488, 8 S. W. 885; Banning v. Loving, 82 Ky. 370; Conant, Ellis & Co. v. Seneca County Bank, 1 Ohio St. 298; Seale v. Baker, 70 Tex. 283, 291, 8 Am. St. Rep. 592, 7 S. W. 742; Marshall v. Farmers' & Merchants' Sav. Bank of Alexander, 85 Va. 676, 2 L. R. A. 534, 17 Am. St. Rep. 84, 8 S. E. 586. 34 Delano v. Case, 121 Ill. 247, Am. St. Rep. 81, 12 N. E. 676, aff'g 17 Ill. App. 531; Wolfe v. Simmons, 75 Miss. 539, 23 So. 586; Williams v. MeKay, 40 N. J. Eq. 189, 196, 53 Am. Rep. 775. Directors of banks are not only trustees for the corporation, but also, though perhaps in a modified sense, for the creditors of the corporation, who become such by depositing their money with the bank in the ordinary course of such business." Per Vice Chancellor Pitney in Campbell v. Watson, 62 N. J. Eq. 396, 50 Atl. 120. 35 O'Conner Min. & Mfg. Co. v. Coosa Furnace Co., 95 Ala. 614, 618, 36 Am. St. Rep. 251, 10 So. 290; Stone v. Rottman, 183 Mo. 552, 82 S. W. 76; Union Nat. Bank v. Hill, 148 Mo. 380, 71 Am. St. Rep. 615, 49 S. W. 1012; Hart v. Hanson, 14 N. D. 570, 3 L. R. A. (N. S.) 438, 105 N. W. 942; Deaderick v. Bank of Commerce, 100 Tenn. 457, 45 S. W. 786. In Wisconsin, "the directors of a corporation are trustees for it and bear no other relation to its creditors than the agent of an individual to his creditors' Killen v. Barnes, 106 Wis. 546, 564, 82 N. W. 536. 36 Patterson v. Stewart, 41 Minn. 84, 90, 4 L. R. A. 745, 16 Am. St. Rep. 671, 42 N. W. 926. [§ 2272 corporate creditors.37 In Alabama, however, it is held that directors or other corporate officers are not trustees for creditors of the corporation even when the corporation is insolvent.38 This question usually arises in connection with the right of creditors to hold directors liable for negligent management of the corporation resulting in loss primarily to the corporation and secondarily to the corporate creditors,39 and in connection with the right of officers to prefer themselves as creditors.40 § 2272. Duties and responsibilities arising from nature of office. Inasmuch as corporate directors and officers occupy a fiduciary capacity, the following rules are so well settled as to be beyond dispute: 42 1. Directors and other officers must exercise the utmost good faith in all transactions touching their duties to the corporation and its property. For instance, if a director is also employed by the corporation to make purchases for it, he must act in the utmost good faith and buy for the corporation and not for himself. So the general manager of a company, in suing it for salary, money advanced, and the like, must act openly and above board, and a judgment in his favor will be set aside where he was guilty of fraud in keeping knowledge of the suit and the execution sale from the other directors.43 2. All their acts must be for the benefit of the corporation and not for their own benefit, except as hereinafter stated.44 37 City Nat. Bank v. Goshen Woolen Mills Co., 35 Ind. App. 562, 69 N. E. 206; Olney v. Conanicut Land Co., 16 R. I. 597, 5 L. R. Á. 361, 27 Am. St. Rep. 767, 18 Atl. 181. See also McKellar v. Stanton, 104 S. C. 248, 88 S. E. 527. In New Jersey, the courts clearly draw the distinction between directors as trustees for creditors when the corporation is insolvent, and directors as not trustees for creditors when the corporation is solvent. This duty to creditors, upon insolvency, however, said Vice Chancellor Reed, "may arise before actual steps, either voluntary or involuntary, have been taken to wind up a corporate business. I think that when such a condition of corporate affairs confronts the directors that it is obvious that the com * * pany is insolvent, then the duty of the directors to the creditors begins." Bird v. Magowan (N. J. Ch.), 43 Atl. 278. 38 Force v. Age-Herald Co., 136 Ala. 271, 278, 33 So. 866. 39 See $$ 2574-2578, infra. 40 See § 2327, infra, and infra, chapter on Insolvency. 41 Schneider v. Johnson, 161 Mo. App. 375, 143 S. W. 78; Billings v. Shaw, 209 N. Y. 265, 103 N. E. 142, aff'g 151 N. Y. App. Div. 888, 135 N. Y. Supp. 1100. 42 Loewer v. Lonoke Rice Milling Co., 111 Ark. 62, 161 S. W. 1042, and sec § 2283 et seq., infra. 43 Sprague v. Stratton-Massachusetts Gold Mines Co., 53 Colo. 315, 125 Pac. 490. 44 See § 2281 et seq., infra. 3. They are not permitted to profit as individuals by virtue of their position.45 4. Any profits received by them from the company's property or business belongs to the company and they hold the same as trustees for the benefit of the corporation and its stockholders. 46 However, the fiduciary relationship does not make an officer liable as an insurer.47 A director is not an insurer and therefore he is not liable for a loss of corporate assets unless he was negligent and, if negligent, the negligence was the cause of the loss. 48 § 2273. Right to urge fiduciary relation where corporation and officer in effect the same. Where the corporation is a mere shadow organized and maintained by a person as a cloak or alias under which to conduct his own business, he cannot insist that he, as president, bears towards the corporation a fiduciary relation so as to prevent him from lawfully authorizing a bank to apply a deposit in the corporate name to discharge his personal debt.49 § 2274. Fiduciary relationship as extending to subsidiary corporation. Where one corporation obtains control of another corporation, the directors of the former corporation, in so far as their acts affect the rights of stockholders in the subsidiary corporation, occupy a fiduciary relation towards the latter.50 § 2275. Title to and possession of corporate property-In general. Directors, before dissolution of the corporation, do not, by virtue of their office, hold or possess any title to or interest in the property of the corporation.51 This is one of the reasons usually advanced for holding that a director or other corporate officer is not, strictly speaking, a trustee. However, under some circumstances, a corporate officer may hold corporate property under an express or implied trust, for the benefit of the corporation, as where he used corporate funds to purchase it in his own name, or the like.52 If an officer holds 45 See §§ 2303-2324, infra. 46 See §§ 2303-2324, infra. 47 Mowbray v. Antrin, 123 Ind. 24, 23 N. E. 858, holding treasurer of private corporation not liable to corporation for loss of corporate funds and papers, where not negligent. 48 Wallach v. Billings, 277 Ill. 218, 115 N. E. 382. 49 Hanson Sheep Co. v. Farmers' & Traders' State Bank, 53 Mont. 324, 163 Pac. 1151. 50 Cannon v. Brush Elec. Co., 96 Md. 446, 94 Am. St. Rep. 584, 54 Atl. 121. 51 Rossi v. Caire, 174 Cal. 74, 161 Pac. 1161. 52 Corporate officers who use corporate funds, either directly or indirectly, in purchasing its stock from third persons, hold it as trustee for stock as trustee for the corporation, then of course he must account to it for the dividends received on such stock.53 However, a corporate officer is not chargeable with interest on corporate funds which he holds merely as custodian thereof,54 but he is chargeable with interest on funds misappropriated by him.55 §2276. Estoppel to dispute title or set up adverse title. Inasmuch as corporate officers hold corporate property for the corporation and not otherwise, they are estopped to dispute the corporation's title to or custody of the property.56 Moreover, one in possession of corporate property as its manager, cannot, while still sustaining that relation, take possession of the premises in his own right.57 § 2277. Engaging in rival business. There are only a few decisions relating to the right of corporate officers to engage in a rival business, and the most of these are more or less confined to the facts of the particular case so that the rights of officers in this respect is not clearly defined by the courts. In a New York case, it was said: "But I know of no rule which prohibits a director of a corporation engaging in a business similar to that carried on by the corporation, either in his own behalf or for another corporation of which he is likewise a director. True, he owes to his stockholders the most scrupulous good faith. He may not deal with the trust property for his own advantage. He may not deal in his own behalf in respect to any matter involving his rights and duties as a director. He may not seek his own profit at the expense of the company or its stockholders. But, so long as he violates no legal or moral duty which he owes to the corporation or its stockholders, he is entirely free to engage in an independent competitive business." 58 Likewise it was held in Missouri that where the president of a packet company tried to secure contracts to carry mail from the government for the company but was unsuccessful, he had the right to make a contract in his own behalf for carrying the mails.59 So it has been held that corporate directors the company. 53 Zeckendorf v. Steinfeld, 225 U. S. 445, 56 L. Ed. 1156, modifying 12 Ariz. 245, 100 Pac. 784. 54 Red Bud Realty Co. v. South, 96 Ark. 281, 131 S. W. 340. 55 Red Bud Realty Co. v. South, 96 Ark. 281, 131 S. W. 340, and see § 2722, infra. 56 Burley Tobacco Co. v. Vest, 165 Ky. 762, Ann. Cas. 1917 B 149, 178 S. W. 1102. 57 Buckhorn Plaster Co. v. Consolidated Plaster Co., 47 Colo. 516, 108 Pac. 27. 58 New York Automobile Co. V. Franklin, 49 N. Y. Misc. 8, 97 N. Y. Supp. 781. 59 In this case, the president in carrying out the contract made use of 60 and officers, "so long as they acted with good faith to their associates" in the company, are not debarred from engaging in the same business, "especially in a place where that company was not authorized by its charter to operate. On the other hand, it is held in New Jersey that "it was not lawfully possible for the defendant, while a director and treasurer of complainant corporation, to enter into an opposition business in his own behalf of such a nature that it would cripple or injure the corporation that he represented." 61 It would seem to be beyond doubt that after a corporation has become insolvent and has practically ceased to exist, its president may contract to do the business which the corporation previously did.62 § 2278. Protection of trade secrets. The rule that equity will restrain an employee from making disclosures or use of trade secrets communicated to him in the course of a confidential employment,63 applies equally well, it seems, to officers of a corporation,64 although there is nothing peculiar to corporations in so far as the law relating thereto is concerned. § 2279. Sale of influence in management of company. "It is clear," says Mr. Morawetz, "that a director has no right to sell his influence in the management of the company, or to enter into any agreement by which his official action would be influenced or controlled. Such an agreement would be dishonest and illegal; it would be an agreement to commit a breach of trust." 65 This question has already been considered in a preceding volume,66 and is also treated of hereafter.67 § 2280. Termination of fiduciary relation. When a corporate officer ceases to act as such, either because of his resignation or removal * * * both his company and also of others' 60 Barr v. Pittsburgh Plate Glass Co., 51 Fed. 33, 39. 61 Hussong Dyeing Mach. Co. V. Morris (N. J. Ch.), 89 Atl. 249. 62 Murray v. Vanderbilt, 39 Barb. (N. Y.) 140. 63 See note in 44 L. R. A. (N. S.) 1160. 64 Pomeroy Ink Co. v. Pomeroy, 77 N. J. Eq. 293, 78 Atl. 698. 651 Morawetz, Corporations, § 519. |