calls for careful scrutiny, but of itself, alone, it does not necessarily render the transaction void. * Such a transaction may be made in good faith for the best interests of the corporation. It may be avoided or may be ratified by the corporation." 78 It has been held that if a lease is made by the board of directors to a minority of the board, it is voidable and not void, notwithstanding the latter used their position to advance their personal interests.79 In any event, a contract by a director to lease property to the corporation is binding upon him.80

§ 2368. Loans to corporation. Directors or other officers may loan money to the corporation, where they act in good faith,81 although they are not in duty bound to do so,82 and may also take and

enforce security therefor.83 The fact that the loan is made by a corporate officer is unimportant except that it imposes the necessity of a closer scrutiny, and requires that his conduct appear to have been for the company's interest and aboveboard.84 In the leading case on this subject, the Supreme Court of the United States has held that "it cannot be maintained that any rule forbids one director among several from loaning money to the corporation when the money is needed, and the transaction is open, and otherwise free from blame. No adjudged case has gone so far as this. Such a doctrine, while it would afford little protection to the corporation against fraud or oppression, would deprive it of the aid of those most interested in giving aid judiciously, and best qualified to judge of the necessity of that aid, and of the extent to which it may safely be given."' 85 fact, at the present time, the only question which presents itself, ordinarily, is whether the lender of money to his company can obtain a preference for his claim over other creditors by reason of his being on the inside and having knowledge of the prevailing conditions— a matter already considered in this chapter.86

Where the president of a corporation loans his money to the company, and the loan is free from actual fraud, it has been held that the company cannot escape liability for the loan which it has received. and used, on the ground that the loan was made for the company by the president from himself and without any action of the board of directors.87 However, it would seem, and it has been so held, that loans by corporate officers to the corporation come within the rule that if the officers also represent the corporation in a transaction, it is voidable at the instance of the corporation or stockholders although entered into in good faith and it is fair and just.88

The better and safer practice, it would seem, is for the officer who has money to lend to do so in his own name and not cover up the transaction by making the loan in the name of a third person. Thus, in a federal case, where a board of directors authorized the president of the corporation to borrow a certain sum and execute a mortgage

83 See § 2326, supra.

84 Converse v. Sharpe, 161 N. Y. 571, 56 N. E. 69, aff'g 37 N. Y. App. Div. 399, 55 N. Y. Supp. 1080. To same effect Williams v. Jones, 23 Mo. App. 132.

"He is held to a higher degree of good faith than a creditor who has no interest in the corporation. This is about the only difference." Os

borne's Adm'x v. Monks, 14 Ky. L. Rep. 606, 21 S. W. 101.

85 Twin-Lick Oil Co. v. Marbury, 91 U. S. 587, 589, 23 L. Ed. 328. 86 See § 2326, supra.

87 Bossert v. Geis, 57 Ind. App. 384, 107 N. E. 95.

88 Bingham v. Bell & Zoller Coal Co., 175 Ill. App. 469, 477.

as security, and he borrowed it from himself and another director, paying a twenty per cent. commission for the loan, but the names of the lenders were not disclosed to the other directors, it was held that the lending officers should have disclosed to the board that they themselves had decided to advance the money, and that because of failure so to do the corporation had a right to rescind the agreement to pay the commission for the loan and to have the mortgage cancelled, upon repayment of the amount loaned.89 In California, however, it is held that it was not a fraud for directors to fail to disclose the fact to co-directors that they were the real parties who were loaning money to the corporation or that the person in whose name the transaction was had was merely a figurehead.90

Of course, the loan must be a fair one and made in good faith.91 Thus, an officer loaning money to his corporation cannot charge compound interest, where such interest is forbidden unless based on an express agreement based on a good consideration.92

Of course if a corporate officer loans money to the corporation under an agreement that it should become payable when the surplus of the company should exceed a certain sum, he cannot recover where the existence of such surplus is not shown.93

§ 2369. Payment by officer of valid outstanding claims against the corporation. Where a director or other corporate officer pays. valid existing debts of the corporation, he is ordinarily entitled to reimbursement.94 Thus, where the manager of a company has been

89 Bensiek v. Thomas, 66 Fed. 104. 90"It was no violation of their duty as trustee to loan the money in the name of another rather than in their own, unless it could be shown that thereby the corporation sustained some detriment, or they obtained some undue advantage over the corporation." Schnittger v. Old Home Consol. Min. Co., 144 Cal. 603, 78 Pac. 9. 91 Cannot be enforced where entered into in bad faith to protect debts of the lending directors and where terms of the loan were oppressive. Bingham v. Bell & Zoller Coal Co., 175 Ill. App. 469.

92 Tilton v. Gans, 90 N. Y. Misc. 84, 152 N. Y. Supp. 981, aff'd 168 N. Y. App. Div. 908, 910, 152 N. Y. Supp. 1146.

93 Koster v. Lafayette Trust Co., 147 N. Y. App. Div. 63, 131 N. Y. Supp. 799.

94 Savage V. Madelia Farmers' Warehouse Co., 98 Minn. 343, 108 N. W. 296.

If the manager of a company spends his own money in good faith for the benefit of the corporation, he may recover the amount so expended from the company. Atlantic City & Suburban Gas & Fuel Co. v. Johnson, 81 N. J. Eq. 351, 514, 88 Atl. 163.

Directors expending money in saving property to the corporation are entitled to be reimbursed for their expenditures. Coombs v. Barker, 31 Mont. 526, 79 Pac. 1.

A solvent corporation may assign a note to its president to reimburse

accustomed for years to pay debts of the company from his own pocket and thereafter reimburse himself from the corporate funds, and the directors never objected thereto although they knew about it, he may recover back moneys advanced by him, as against the contention that the payments were voluntary and hence cannot be recovered.95

§ 2370. Loans by corporation to officers. Except where expressly forbidden by statute or where the loan is in excess of the limit fixed by statute as applicable to loans to officers, as is often the case in connection with banks,96 a director or other corporate officer may borrow money from the corporation,97 without any necessary imputation of fraud,98 provided there is no breach of trust in making the loan.99 However, if corporate officers become borrowers from the corporation, their transactions for their own benefit are closely scrutinized. Where a director of a building association borrows money from the company, he cannot set up as a defense to a recovery of the loan a secret parol agreement between himself and the other directors whereby the loan had been repaid by his stock in the association having been fully paid up.2

In many jurisdictions there are statutes expressly prohibiting the directors or other managing officers of particular corporations, such as savings banks, banks generally, insurance companies, etc., from

him for money advanced for the corporation. Blake v. Ray, 110 Ky. 705, 23 Ky. L. Rep. 84, 62 S. W. 531.

95 In re Gouverneur Pub. Co., 168 Fed. 113.

If a general manager pays out money from time to time for corporate debts, with the knowledge of the directors, he may recover such payments as against the objection that the payments were voluntary ones. Sutton v. Farmers' Union Warehouse Co., 11 Ga. App. 338, 75 S. E. 336.

96 Pemigewassett Bank v. Rogers, 18 N. H. 255.

In Minnesota, statute prohibits trust companies from loaning their funds to any director or officer. Shearer v. Barnes, 118 Minn. 179, 136 N. W. 861.

SG-ison Canning Co. v. Stanley, 133 Iowa 57, 10 N. W. 171. See also

Bluehill Academy v. Ellis, 32 Me. 260.

Where one who is the president and director of a bank borrows money from the bank under a contract to pay to it a usurious rate of interest on the loan, he will not be permitted thereafter to take advantage of the provision for the illegal rate of interest to escape payment of any interest whatsoever, as the statute provides in ordinary cases. Gund v. Ballard, 73 Neb. 547, 103 N. W. 309.

98 Garrison Canning Co. v. Stanley, 133 Iowa 57, 110 N. W. 171.

99 North Carolina R. Co. v. Wilson, 81 N. C. 223.

1 In re Conyngham's Appeal, 57 Pa. St. 474.

2 Pangborn V. Citizens' Bldg. Ass'n of Plainfield, 35 N. J. Eq. 341.

borrowing any of the funds or deposits of the corporation, directly or indirectly, and imposing a penalty for violation of the statute, or making its violation a misdemeanor. A statute prohibiting a director of a corporation from borrowing any of its deposits or funds is intended for the protection of the stockholders and depositors or creditors, and does not preclude the corporation from suing a director to recover money loaned to him in violation of the statute, or from enforcing securities taken by it in the transaction.3

§ 2371.

Compromise of claims. The fact that a majority of the directors are also creditors makes a compromise and settlement by the board of such claims against the company, voidable at the option of the company, although the settlement was for the best interests of the corporation at the time.4

§ 2372. Cancellation of contracts. It has been held that the president of a company cannot cancel a corporate contract where his own private interest would be advanced thereby at the expense of the corporation, where not expressly authorized to do so by the board of directors with full knowledge of the facts.5

§ 2373. Issuance of stock to directors or other officers. The rules as to dealings between the directors or managing officers of a corporation, and the corporation itself, apply equally well to the issuance of stock to themselves.6

§ 2374. -Voting compensation to themselves as directors. This is fully considered in another chapter.7

3 Brittan v. Oakland Bank of Savings, 124 Cal. 282, 71 Am. St. Rep. 58, 57 Pac. 84; Savings Bank of San Diego County v. Burns, 104 Cal. 473, 38 Pac. 102; Lester v. Howard Bank, 33 Md. 558, 3 Am. Rep. 211; Bowditch v. New England Mut. Life Ins. Co., 141 Mass. 292, 55 Am. Rep. 474, 4 N. E. 798.

4 Higgins v. Lansingh, 154 Ill. 301, 363-369, 40 N. E. 362. To same effect, Leonhardt V. Citizens' Bank of Ulysses, 56 Neb. 38, 76 N. W. 452.

5 Wallace v. Oceanic Packing Co., 25 Wash. 143, 64 Pac. 938.

6 Where the rights of creditors are not involved, officers of a corporation

organized for the manufacture of a patented article of purely speculative value, who in good faith and with the assent of the other stockholders give their time, skill and means in attempting to develop the business, and place it on a firm financial footing, in consideration of a transfer to them of a portion of unissued stock, which has no present marketable value, are not liable to the corporation for the par value of the stock. Divine v. Universal Sew. Mach. Motor Attachment Co. (Tenn. Ch. App.), 38 S. W. 93.

7 Infra, chapter on Compensation of Officers.