thorized by the board of directors.45 There is a diversion where directors of an insolvent corporation, on selling its property, convert to their own uses capital stock of the purchasing company which was received in part payment.46 Thus, where, on selling all the property of an insolvent corporation, the directors receive in part . payment stock of the purchasing corporation, and they convert it to their personal uses by taking the stock in their own name, they are liable to their corporation for the value of the stock at the time. it was taken.47

§ 2511. - Stock transactions. The subject of the misappropriation is often shares of stock.48 Stockholders may hold corporate officers individually liable where they cause a large amount of stock to be issued to themselves upon a consideration grossly inadequate, if not wholly valueless.49 Where directors cause shares of stock to be issued and delivered to themselves through a circuitous channel and upon a grossly inadequate consideration, there is such a fraud and misappropriation as to make the directors personally liable.5 50 So the manager of a corporation, who has by agreement cancelled part of the stock owned by him and had new certificates issued to him as manager of the corporation for its benefit, is liable to the corporation for the misappropriation of the proceeds of such stock.51 Purchases of corporate stock by corporate officers with corporate assets makes such officers trustees of the stock for the benefit of the corporation.52

§ 2512. Payment of personal debts of officers. Directors or other corporate officers have no authority to use corporate funds to pay their private debts; 53 and it is immaterial that a majority of

45 Cheat Valley R. Co. v. Humes, 211 Pa. 287, 60 Atl. 908.

46 Folsom v. Smith, 113 Me. 83, 92 Atl. 1003.

47 Folsom v. Smith, 113 Me. 83, 92 Atl. 1003.

48 A manager of a corporation may make a valid gift of shares which he owns to the corporation, and a misappropriation thereof later will render him liable. Wheeler v. Mineral Farm Consol. Min. Co., 31 Colo. 110, 71 Pac. 1101.

49 Pollitz v. Wabash R. Co., 207 N. Y. 113, 100 N. E. 721.

50 Pollitz v. Wabash R. Co., 207 N. Y. 113, 100 N. E. 721, 150 N. Y. App. Div. 715, 135 N. Y. Supp. 789.

51 Wheeler v. Mineral Farm Consol. Min. Co., 31 Colo. 110, 71 Pac. 1101. 52 Barker v. Montana Gold, Silver, Platinum & Tellurium Min. Co., 35 Mont. 351, 89 Pac. 66.

53The rule that an agent cannot use the property of his principal to pay his own debt applies to agents of every grade. The director of a corporation is no more exempt from this rule than the humblest agent in its service." Kenyor Realty Co. v.

[§ 2513 the directors knew of such use and consented thereto, since a contract which directors have no power to make cannot be ratified by them.54 Thus payment of attorney's fees from corporate funds for services to the directors individually may be recovered from the directors by the corporation.55 So the president and general manager is liable to the corporation where he pays attorneys for services rendered to him as an individual.56 The expenses of defending such a suit are not chargeable to the corporation notwithstanding the com pany is made a nominal defendant.57 The act of directors in hiring lawyers to act for or defend themselves personally, and paying them out of the corporate assets is, of course, a breach of duty for which the corporation may recover.58 But there is no diversion where the directors lawfully spend money to employ counsel to appear and act for the corporation in defending suits brought by stockholders, acting solely for their own interests, to set aside a reorganization of the corporation.59

§ 2513. Excessive salaries. The diversion may take the shape of excessive salaries voted and paid to themeslves or others by the of ficers in power, for which they are liable to the corporation at least. as to the excess.60 Thus, the manager of a bankrupt company is liable for the amount of salary received by him in excess of a fair compensation for services rendered.61 The misappropriation may

National Deposit Bank, 140 Ky. 133, 31 L. R. A. (N. S.) 169, 130 S. W. 965. 54 Kenyon Realty Co. v. National Deposit Bank, 140 Ky. 133, 31 L. R. A. (N. S.) 169, 130 S. W. 965.

55 Percy v. Millaudon, 3 La. 568, 8 Mart. N. S. (La.) 68; Hooker, Corser & Mitchell Co. v. Hooker, 88 Vt. 335, 92 Atl. 443.

Rule also applies to other officers. Wickersham v. Crittenden, 106 Cal. 329, 39 Pac. 603.

56 Chabot & Richard Co. v. Chabot, 109 Me. 403, 84 Atl. 892.

57 McConnell v. Combination Mining & Milling Co., 31 Mont. 563, 79 Pac. 248.

58 Hooker, Corser & Mitchell Co. v. Hooker, 88 Vt. 335, 92 Atl. 443. 59 Corey v. Independent Ice Co., 226 Mass. 391, 115 N. E. 488.

60 United States. Wight v. Heu

blein, 238 Fed. 321; Harrison V. Thomas, 112 Fed. 22.

Indiana. Green v. Felton, 42 Ind. App. 675, 84 N. E. 166.

Maryland. Matthews v. Headley Chocolate Co., 100 Atl. 645.

Minnesota. Green v. National Advertising & Amusement Co., 162 N. W. 1056.

New Jersey. Lillard v. Oil, Paint & Drug Co., 70 N. J. Eq. 197, 58 Atl. 188, 56 Atl. 254.

New York. Tilton v. Gans, 90 Misc. 84, 152 N. Y. Supp. 981, aff'd 168 App. Div. 908, 910, 152 N. Y. Supp. 1146; A. & M. Robbins v. Hill, 81 Misc. 441, 142 N. Y. Supp. 637; Miller v. Crown Perfumery Co., 57 Misc. 383, 109 N. Y. Supp. 760.

61 Atherton v. Emerson, 199 Mass. 199, 85 N. E. 530.

consist of payments by directors to themselves of money as additional salary, where excessive, although disguised as a dividend.62 So directors cannot vote themselves stock bonuses for certain acts where they have received pay for such acts.63

An interesting case, decided in 1917 by the Court of Appeals of Maryland, involved the right of a corporation to recover from directors and other officers the amount of excessive salaries paid out by the directors. The facts were somewhat peculiar, in that, after directors had voted and paid themselves excessive salaries, one of them sold a controlling interest in the corporation to a third person after which, a new board having been elected, the corporation itself filed a bill against the former directors to recover from them the amount paid as salaries so far as excessive. The main question involved was whether the corporation itself could sue-it being admitted that minority stockholders could have sued-by reason of the fact that the holder of the controlling interest purchased it from one of the directors against whom recovery was sought. The court held that the rule that stockholders who become such after excessive salaries are voted and paid to officers, cannot recover the excess as against the directors, was applicable; but that a recovery might be had in the name of the corporation for the benefit of minority stockholders, to the extent "of the proportions of the sum recovered due such minority stockholders, if any, as are not barred by laches, limiitations, acquiescence, or other way sufficient to bar them in equity, and anything recovered should be directed to be paid to them by the corporation." 64

§ 2514. - Freezing out former partner. This claim of misappropriation of corporate funds often arises in case of a dispute arising from the incorporation of a trading partnership followed by the death or incapacity of one of the members and the adoption by the others of measures to limit the dividends of the inactive stockholder to what they conceive he ought to have.65 In such cases, if the di

62 Godley v. Crandall & Godley Co., 153 N. Y. App. Div. 697, 139 N. Y. Supp. 236.

63 Central Consumers' Wine & Liquor Co. v. Madden (N. J. Ch.), 68 Atl. 777.

Gifts of stock to each director as a reward for selling stock are fraudulent where they had received commis

sions as agents for such sales. Central Consumers' Wine & Liquor Co. v. Madden (N. J. Ch.), 68 Atl. 777.

64 Matthews v. Headley Chocolate Co., 130 Md. 523, 100 Atl. 645.

65 See Godley v. Crandall & Godley Co., 212 N. Y. 121, L. R. A. 1915 D 632, 105 N. E. 818.

It seems that the appropriation of

rectors distribute the surplus earnings among themselves and certain employee stockholders under the guise of additional salaries but upon the uniform basis of a certain per cent. of the capital stock held by each, and not according to the services rendered the corporation by the distributees, the directors are personally liable to the corporation and to its stockholders for the misappropriation.66

68

§ 2515. Payment of debts. There is no unlawful diversion of corporate funds, so far as the corporation itself is concerned, merely because directors pay a particular corporate debt,67 even if thereby they save themselves as guarantors.6 So directors are not responsible for paying a just debt notwithstanding the corporation was insolvent at the time, but if the payment was an unlawful preference the remedy is against the creditor.69 But the corporation may sue its vice president for paying out corporate funds to one who he knew was not entitled to receive them.70

§ 2516. Remedies for conversion. If a corporate officer misappropriates corporate funds and then invests them for himself personally, equity regards such investment as made for the benefit of the corporation and will enforce the trust resulting in favor of the corporation." If a corporate officer invests its funds in stock of the company, the corporation has the option either to hold the stock as its own or to hold the officer personally liable.72

§ 2517. Extent of liability. Where all the directors either join or consent to a misappropriation of corporate funds, each is liable for the entire amount diverted, without regard to the degree of

the business and good-will of a corporation by majority officers, in an attempt to freeze out minority interests, makes them liable to account to such minority stockholders for the reasonable value of such good-will. Godley v. Crandall & Godley Co., 153 N. Y. App. Div. 697, 139 N. Y. Supp. 236.

66 Godley v. Crandall & Godley Co., 212 N. Y. 121, L. R. A. 1915 D 632, 105 N. E. 818.

67 See Manhattan Fire Ins. Co. City of New York v. Fox, 74 N. Y. App. Div. 271, 77 N. Y. Supp. 657, aff'd

without opinion in 177 N. Y. 576, 69 N. E, 1126.

68 Folsom v. Smith, 113 Me. 83, 92 Atl. 1003.

69 Wait v. McKee, 95 Ark. 124, 128 S. W. 1028.

70 Mutual Life Ins. Co. v. Granniss, 60 N. Y. Misc. 187, 112 N. Y. Supp. 1074. But see same case in 57 N. Y. Misc. 174, 107 N. Y. Supp. 926.

71 Red Bud Realty Co. v. South, 96 Ark. 281, 131 S. W. 340.

72 Dacovich v. Canizas, 152 Ala. 287, 44 So. 473.

dereliction of which each is guilty.73 In a proper case, interest is recoverable.74 If directors unlawfully and knowingly receive money in excess of what is due, they are liable for interest in a suit to recover such moneys.75 Thus, the treasurer is liable to the corporation for interest on corporate money used by him for personal purposes for more than a year, notwithstanding such use created an overdraft in a bank.76

§ 2518. Question as one for jury. Generally the question whether there actually was a misappropriation is one of fact for the jury.77

XXVII. LIABILITY OF OFFICERS ON CORPORATE CONTRACTS OR FOR DEBTS OF THE CORPORATION

§ 2519. General considerations. The principles governing the liability of agents to third persons, as set forth in leading textbooks on the law of agency,78 apply equally well where third persons attempt to hold officers or agents personally liable on corporate contracts executed by them. Hence, reference should be made thereto for a more extended discussion of the law applicable to this subject.

§ 2520. Authorized contract for disclosed principal. If a corporate officer makes an authorized contract in the name of the corporation, so as to bind the corporation, the contract is with the corporation only, and the other party to the contract cannot hold the officer personally liable, where there is no statute creating such a liability, unless the contract is so worded or signed as to make the officer liable. If he contracts in the name of the corporation, or in

73 Cooper v. Hill, 94 Fed. 582, 587. 74 Rogers Hardware Co. v. Rogers, 10 Dom. L. R. (Can.) 541.

Where a treasurer draws corporate funds from the bank and uses them for a period of more than a year, the withdrawing of the funds constituting an overdraft at the bank and being used for private purposes, he may be charged with interest on the money. Oregon Gold Min. Co. v. Schmidt, 22 Ky. L. Rep. 1330, 60 S. W. 530.

When directors or other officers of a corporation have misappropriated its funds, they are liable for interest

on the amount from the date of the misappropriation, as damages. Cooper v. Hill, 94 Fed. 582.

75 Marvel v. Endicott, 85 N. J. Eq. 52, 95 Atl. 361, aff'g 81 N. J. Eq. 378, 87 Atl. 230.

76 Oregon Gold Min. Co. v. Schmidt, 22 Ky. L. Rep. 1330, 60 S. W. 530.

77 Saranac & L. P. R. Co. v. Arnold, 167 N. Y. 368, 60 N. E. 647, rev'g 41 N. Y. App. Div. 482, 58 N. Y. Supp. 710.

78 See 1 Mechem, Agency (2nd Ed.), §§ 1356-1450; 2 Clark & Skyles, Agency, $$ 524-542.