on the paper. 92 So where the purpose of the sale of new stock by a vote of a majority of the directors was to wrest control of the corporation from a dissenting director and the majority of the stockholders, and to transfer control to the majority directors and the recipient of the stock, it was held that "such sale was a breach of the duty of the directors, and could confer no rights upon the beneficiary, who knew of and participated in the unlawful act and purpose.

193

However, it has been held that this rule as to dealings between a corporation and its officers, requiring them to be absolutely fair, does not apply to a transfer of a stock of goods to the corporation by an officer in payment for stock of the company, although the company has not received full value in money for the stock, where no rights of creditors are involved.94

§ 2336. Effect of insolvency of corporation. The right of directors and other corporate officers to deal with the corporation is considerably decreased when the corporation is insolvent,95 especially in regard to taking security for debts owing by the corporation to the officer.96 This question, as to dealings after the corporation becomes insolvent, is treated of in a subsequent volume in the chapter relating to insolvency.

§ 2337.- Presumptions and burden of proof. As hereafter stated, there is some diversity of opinion in the decisions as to whether transactions between a corporation and its officers, where the corporation is represented in the transaction by other officers, is voidable at the option of the corporation merely because of the relationship of the parties, or whether the transaction can be avoided only where unfair or entered into in bad faith.97 The weight of authority is in favor of the latter rule, although if the officer represents both parties to the transaction it is almost universally held that it is voidable merely because of the relationship.98 In this connection, however, the question to be considered is what are the presumptions and upon whom the burden of proof rests where the ground urged for setting aside the transaction is that it is unfair or entered into in bad faith. As

92 Hicks v. Steel, 126 Mich. 408, 85 N. W. 1121.

93 Luther v. C. J. Luther Co., 118 Wis. 112, 99 Am. St. Rep. 977, 94 N. W. 69.

94 Iowa Drug Co. v. Souers, 139 Iowa 72, 19 L. R. A. (N. S.) 115, 117 N. W. 300.

95 Beach v. Miller, 130 Ill. 162, 17 Am. St. Rep. 291, 22 N. E. 464, rev'g 23 Ill. App. 151, explaining and limiting Harts v. Brown, 77 Ill. 226 and Merrick v. Peru Coal Co., 61 Ill. 472. 96 Infra, chapter on Insolvency. 97 See §§ 2346, 2347, infra. 98 See 2340, infra.

to this matter, the courts agree that while there is no presumption of unfairness or bad faith in the first instance,99 unless the facts of the particular case are such as to naturally raise such a presumption, yet the burden of proving that the transaction was fair and in good faith is always upon the officer seeking to uphold it. Thus, where an officer loaned money to his corporation, the court said that "the burden is imposed upon him to show by a preponderance of the evidence that he acted bona fide, and that the corporation got the benefit of his act to the extent charged. This rule of the law is not to prevent directors of a corporation from dealing with it, but to prevent them from claiming to have done so when they had not, as well as to prevent their overreaching the trust which they had essayed to protect." Where, however, a director purchases corporate property from trustees whose selection the stockholders and creditors, and not the director, determined, the trustees being empowered to sell the property to pay the debts of the corporation, the burden rests upon one who attacks the purchase. The case stated does not come within the strict rule casting the burden upon a director purchasing property directly from the corporation.3

The presumption that a deed or mortgage is authorized by the stockholders where executed in the manner prescribed by statute and with the corporate seal attached does not apply but is rebutted when executed to officers of the corporation.*

New York. Polhemus v. Polhemus, 114 App. Div. 781, 100 N. Y. Supp. 263.

But see MacNaughton v. Osgood, 41 Hun (N. Y.) 109, holding rule otherwise where action brought by stockholder instead of corporation.

Where action is instituted by the corporation, the burden of proof rests on the officer to show the bona fide character of the transaction, where deemed material. Coombs v. Barker, 31 Mont. 526, 79 Pac. 1.

2 Star Mills v. Bailey, 140 Ky. 194, 140 Am. St. Rep. 370, 130 S. W. 1077.

3 Kessler & Co. v. Ensley Co., 141 Fed. 130, aff'd 148 Fed. 1019 (mem. dec.).

4 Edwards v. Snow Hill Supply Co., 150 N. C. 171, 63 S. E. 742.

IV Priv. Corp.-15

§ 2338. Dealings where officers adversely interested represent the corporation-General considerations. The law is well settled, so far as the governing rules are concerned, as to the effect of corporate transactions or contracts where the corporation is represented by an officer who is also the opposing party to the transaction or contract or whose interests in the particular transaction or contract are adverse to those of his corporation, as follows, viz.:

1. Such transactions or contracts are not void but merely voidable, except perhaps in a very few jurisdictions.5

2. The corporation may evade liability on, or set aside, the transaction or contract merely because of the dual relation of the corporate officer, without regard to its fairness or his good faith.

3. The transaction or contract may be ratified by the corporation so as to preclude it attacking the deal on this ground," or the right to attack may be barred by the laches of the corporation.8

The difficulties encountered are these: (1) when and under what conditions may the corporation be said to be represented by the officer?; (2) when and under what conditions may a corporate officer be said to be adversely interested, within this rule?; 10 (3) how far does the rule apply, if at all, where a corporation deals with another corporation, and the officers of the two corporations are wholly or in part identical? 11

§ 2339. Dealings as invalid because two persons are necessary to a contract. One of the reasons for holding this class of transac tions to be voidable is that a person cannot, as a director or other officer of a corporation, enter into a valid contract on behalf of the corporation with himself in his individual capacity, or be both vendor and purchaser, since two persons are a necessary element in the formation of a contract. The fact that he acts as an officer of the corporation on one side, and for himself on the other, can make no difference.12 This rule, however, does not prevent an officer or agent of a corporation from executing a conveyance, lease or other contract

5 See § 2333, supra.

6 See § 2340, infra.

7 See § 2394 et seq., infra.

8 See §§ 2401, 2402, infra. 9 See §§ 2348-2356, infra.

10 See §§ 2357-2363, infra. For instance, is an officer "interested," as the term is used herein, not only when he is the other party to the contract with whom the corpora

tion, through him, deals, but also where he is indirectly interested, as for instance where he is a member of a firm contracting with the corporation, or a stockholder or officer in another company dealing with the corporation?

11 See §§ 2376-2391, infra.

12 California. Pacific Vinegar & Pickle Works v. Smith, 145 Cal. 352,

between himself individually and the corporation, both for himself and on behalf of the corporation, where he acts for the corporation under the immediate direction of a superior officer, since in such a case the latter is to be regarded as acting for the corporation.13

82340.-Dealings as voidable because of fiduciary relation. If an officer of a corporation, either alone or with other officers, represents the corporation in making or authorizing a contract or other transaction, in which he is personally interested, either directly or indirectly, and his action or consent is necessary, the contract or transaction, even though it may not be void or voidable for want of two parties, comes within the well-settled rule that a trustee cannot become interested to the detriment of his cestui que trust, or an agent to the detriment of his principal.14 No principle in the law of corporations, therefore, is founded on sounder reasons, or more surely settled, than the principle that the directors, trustees or other officers of a corporation, who are intrusted with its interests, and occupy a fiduciary relation towards it, will not be allowed to contract with the

officers, they can convey or mortgage to or contract with themselves as private persons, is in violation of common sense. "Per Orton, J., in Haywood v. Lincoln Lumber Co., supra.

The president of a corporation may not execute a bill of sale of the corporate assets to himself and wife without authority from the directors. Hill v. Marston, 178 Mass. 285, 59 N. E. 766.

Where the president has been commissioned to sell treasury stock it is a violation of trust for him to charge the stock to himself and then retain the proceeds of the sales. Camden Land Co. v. Lewis, 101 Me. 78, 63 Atl. 523.

The cashier of a bank may not accept the note of a third person in favor of the bank in payment of his personal indebtedness to the bank. First Nat. Bank of Emmetsburg v. Gunhus, 133 Iowa 409, 9 L. R. A. (N. S.) 471, 110 N. W. 611.

13 See § 2356, infra.

14 Campbell, J., in People v. Township Board of Overyssel, 11 Mich. 222.

corporation, directly or indirectly, or to sell property to it, or purchase property from it, where they act both for the corporation and for themselves. In such a case, the transaction is, at the least, voidable at the option of the corporation; 15 and it may be avoided and set