lawfully sell the corporate property to themselves at a valuation fixed by themselves. On appeal, however, the supreme court upheld the transfer as one "fair, honest, legal, and for the best interests of the company, as well as of its creditors." 49

§ 2329. Estoppel of officers by reason of mismanagement. It has been held that, where the directors of a corporation, who are also creditors, have permitted the corporation to become indebted in excess of the limit prescribed by its charter or articles, they must be postponed to other creditors, who had no knowledge of the financial condition of the company when they dealt with it and gave it credit.50 If a director advances money to pay corporate debts in excess of the debt limit, he is estopped to claim repayment, from a fund belonging to the stockholders, of moneys which he had paid out for the corporation under an illegal contract creating a debt in excess of the debt limit and with knowledge that there would be no surplus of corporate earnings-it being agreed that the repayment should be from the first surplus of the earnings-until the debts of the corporation are paid and the stockholders restored the stock subscriptions paid by them.51

XXV. PERSONAL DEALINGS OF OFFICER WITH CORPORATION OR WITH CORPORATE PROPERTY

§ 2330. General considerations. A casual perusal of the opinions of the courts as to the validity of dealings of a corporation where one or more of its officers is adversely interested, is apt to confuse because of the statements therein of two apparently diametrically opposed rules but which in fact are readily susceptible of complete reconciliation. Thus, the statement is often made that a corporate officer cannot contract with himself or represent the corporation in any transaction in which he, as an individual, has a conflicting interest.52 Further investigation of this line of cases shows, however, that what they really intend to decide is that a transaction wherein a corporate officer represents the corporation on one side and himself (either individually or as partner or as officer of corporation or the like) on the other side of the transaction, is voidable (not void) 53 and that it may be set aside by the corporation merely because of the

49 Heidbreder v. Superior Ice & Cold Storage Co., 184 Mo. 446, 456, 83 S. W. 466.

50 Gunther v. Basket Coal Co., 107 Ky. 44, 21 Ky. L. Rep. 655, 52 S. W. 931.

51 Croninger v. Bethel Grove Camp Ground Ass'n, 156 Ky. 356, 161 S. W. 230.

52 See §§ 2332, 2338, infra.
53 See § 2333, infra.

relationship of the parties without regard to whether it is fair or unfair to the company or whether the officer acted in good faith or in bad faith.54

On the other hand, the statement often made, which is apparently in conflict with the preceding, is that a corporate officer may contract with his corporation.55 What is meant by this statement is that such a contract is not void as distinguished from voidable, and that it is not even voidable, according to the weight of authority, where the officer acts in, good faith and the transaction is fair to the corporation.56

In other words, it must always be kept in mind that the two general rules governing trustees and fiduciaries in general which are applicable, and the difference between which is often of great importance, as pointed out by Mr. Machen,57 are (1) that "no agent, trustee, or other fiduciary is permitted to contract with himself, or to represent his principal or cestui que trust in any transaction in which he himself has a private conflicting interest, and that if he undertakes to do so the contract or transaction is voidable by the principal or cestui que trust without reference to the question whether or not the transaction was fair and beneficial to the latter"; and (2) “that all contracts or dealings between a trustee and his cestui que trust are prima facie voidable, but if the trustee can prove that he acted with the utmost good faith and made full disclosure of all material circumstances to the person towards whom he occupies a confidential relationship, then the transaction may stand. In other words, the burden

of proof

is upon the fiduciary to show the utmost fairness and the fullest disclosure; but he is not under an absolute disability irrespective of the bona fides of the transaction, as a fiduciary is who under

takes to

Contract with himself or to represent his principal or cestui que trust in a transaction in which he himself has some adverse ininterest." The general rules relating to trusts and trustees

dividual

are applicable, at least so far as the basic principles are concerned.

82331.

Effect of statutes and by-laws. Sometimes, but not often,

the effect of dealings between corporations and others wherein one

or more

to the

case of forbid

54 See

55 See

directors or other corporate officers are interested adversely rporation is expressly fixed by a statute or by-law; and in municipal corporations, municipal charters and laws usually embers of the council and all other local officers from being

2340, infra.

2345, infra.

infra.

56 See

2347,

directly or indirectly interested in any contract with the municipality.58 In at least one state, a statute provides that officers and directors of a railroad corporation shall not be directly or indirectly interested in contracts for furnishing supplies or materials to the corporation.59 So statutes sometimes expressly prohibit loans by banks or other corporations to directors or other corporate officers 60 or prohibit the issuance of bonds to a director.61

Sometimes the by-laws expressly authorize contracts between officers and their corporations. For instance, the by-laws of the United States Steel Corporation provide that "any director individually may be a party to, or may be interested in, any contract or transaction of this company, provided that such contract or transaction shall be approved or be ratified by the affirmative vote of at least ten directors not so interested, "-the by-laws calling for twenty-four directors. 62

In England, the articles of a company provided that contracts between corporations and a director should not be avoided merely because of the fiduciary relation, "provided he discloses the nature of his interest; but no director shall vote in respect of any contract in which he is concerned." 63 In England, where the articles of association of a corporation provided that a director should vacate his office if he was concerned in, or participated in the profits of, any contract with the company, without declaring his interest, but that he should not vacate his office merely because of his membership or interest in a corporation or firm dealing with the company, but his vote should not be counted, it is held that if an officer is a heavy stockholder in the other party to the contract, and he discloses that he is such stockholder, the contract cannot be attacked merely because of his relationship.64

582 McQuillin, Municipal Corporations, § 513.

One who is a stockholder in a private corporation has been held to be "directly or indirectly interested" within a statute prohibiting contracts by municipal corporations in which their officers are directly or indirectly interested. City of London Elec. Lighting Co. v. London Corporation, [1901] 1 Ch. 602.

59 Baumhoff v. Grueninger, Mo. —, L. R. A. 1916 A 779 with note, 178 S. W. 102.

60 See § 2640, infra.

61 Toledo, St. L. & K. C. R. Co. v. Continental Trust Co., 95 Fed. 497,

525.

62 Fletchers, Corp. Forms, 687.

63 Transvaal Lands Co. v. New Belgium Land & Development Co., [1914] 2 Ch. 488, 505, holding provision not applicable where director voted.

64 Costa Rica Ry. Co., Ltd. v. Forwood, [1901] 1 Ch. 746, aff'g [1900] 1 Ch. 756, and see, construing like provisions, Imperial Mercantile Credit Ass'n v. Coleman, L. R. 6 Ch. 558.

$2332. General rules without reference to whether interested officer represents corporation or whether corporation represented by other officers-In general. In many decisions it does not appearand no reference is made in the opinion, in regard thereto-whether the officer who is interested in or the other party to the transaction or contract, also acted in the deal as the agent or representative of the corporation, or whether the corporation was represented by other officers, but nevertheless the courts 65 in such decisions rule as to the validity of dealings between interested corporate officers and the corporation. Moreover, in certain aspects, so far as the governing rule of law is concerned, it is immaterial whether the officer represents the corporation or whether it is represented by other officers. Without regard to whether the officer or officers dealing with the corporation were the principal or sole representative of the corporation in the transaction, or whether the corporation was represented wholly or principally by other officers, there are certain rules common to both classes of transactions, viz.:

1. The transaction or contract is not void but is merely voidable, according to the great weight of authority.66 What is meant by this is merely that if no steps are taken to rescind or set aside the contract, it remains in force as a valid contract, although perhaps if application should be made to set it aside, the court would grant relief merely because of the relationship of the parties without regard to the fairness of the deal or the good faith of the parties.

2. Such transactions or contracts, in all cases where attacked, will be subjected to careful and close scrutiny to ascertain if they are fair and bona fide, even if not voidable merely because of the relationship of the parties.67

3. Such transactions or contracts may always be set aside, or other proper relief granted, where unfair or entered into in bad faith, if proper steps so to do are taken by the corporation or its stockholders, where there is no bar by delay or estoppel.68

fail to

65 To reiterate: in studying the decisions relating to this subject, it is noticeable that many of them either in no way refer to the difference, or else in any way distinguish, between contracts or other transactions (1) between a corporation and one or more of its officers where the corporation is represented by other officers or other directors making up a quorum and a majority of the quorum, and (2) those where the officer who acts on the

other side of the transaction acts also as the sole representative of the corporation or else is a director whose presence is necessary to make up a quorum or whose vote is necessary to make a majority vote.

66 See § 2333, infra.
67 See § 2334, infra.

68 See § 2335, infra, and also Ekberg v. Swedish-American Pub. Co., 114 Minn. 196, 130 N. W. 1029.

4. If there has been actual fraud on the part of the officer, then the corporation may have the transaction set aside, independently of the relationship of the parties thereto.69

5. The burden of showing that the transaction or contract is fair and entered into in good faith, when it is attacked, is on the corporate officer.70

§ 2333. Dealings as void or voidable. Except for a few straggling cases, of more or less doubtful authority, it is well settled in nearly all jurisdictions that transactions or contracts wherein a director or other corporate officer is interested adversely to the corporation are not void, but are merely voidable at the option of the corporation,71