Hawaiian Intern. Finances, Inc. v. Pablo

• Decision Date: 23 September 1971
• Docket Number: No. 5031,5031
• Citation: 53 Haw. 149,488 P.2d 1172
• Parties: , 47 A.L.R.3d 365 HAWAIIAN INTERNATIONAL FINANCES, INC., a Hawaii corporation, Plaintiff-Appellant, v. Pastor A. PABLO et al., Defendants-Appellees.
• Court: Hawaii Supreme Court

Page 1172

488 P.2d 1172

53 Haw. 149, 47 A.L.R.3d 365

HAWAIIAN INTERNATIONAL FINANCES, INC., a Hawaii corporation, Plaintiff-Appellant, v. Pastor A. PABLO et al., Defendants-Appellees.

No. 5031.

Supreme Court of Hawai'i.

Sept. 23, 1971.

Syllabus by the Court

1. Generally, a director while engaged in a transaction for his corporation cannot retain an undisclosed profit.

2. Where a corporate director received undisclosed commissions while representing his corporation in the purchase of investment properties, the fact that the director anticipated receiving the commissions

should have been disclosed to the corporation.

3. The relation of directors to the corporations they represent is a fiduciary one.

4. A trustee may receive reasonable compensation for special services rendered the trust estate.

5. The general rule is that directors of a corporation are not entitled to recover any compensation for performing their ordinary duties unless such compensation is authorized.

6. When the opportunity to make a profit arises from the position occupied by a fiduciary the profit realized belongs to the principal, at least when the fiduciary has excluded his principal from any chance to enjoy the opportunity coming to the fiduciary in this manner.

7. The contention of ultra vires does not lie in the mouth of a corporate officer claiming the profits of a transaction for himself.

Keith J. Steiner, Honolulu (Padgett, Greeley, Marumoto & Akinaka, Honolulu, of counsel), for plaintiff-appellant.

Herbert Y. C. Choy, Honolulu (John D. McComish, Honolulu, with him on the brief; Fong, Miho, Choy & Robinson, Honolulu, of counsel), for defendants-appellees.

Before RICHARDSON, C. J., ABE, LEVINSON and KOBAYASHI, JJ., and MENOR, Circuit Judge, in place of MARUMOTO, J., disqualified.

KOBAYASHI, Justice.

This is an appeal by Hawaiian International Finances, Inc., a Hawaii corporation (herein appellant), from a judgment of the circuit court providing that Pastor Pablo (herein Pablo), Rufina Pablo (herein Mrs. Pablo) and Paster Pablo Realty, Inc., a Hawaii corporation (herein Pablo Realty) (all collectively herein appellees), are not liable to appellant for certain commissions received by appellees for their participation in the procurement of certain investment properties for appellant.

Although appellant appeals from both the conclusions of law and findings of fact of the trial court, the requisite facts necessary for a proper disposition of this case are not in dispute. As such, the factual rendition is concise and includes only those facts considered essential by this court. They are in part as follows:

FACTS

Pablo was president of appellant during the time the events pertinent to this case took place. In addition he and his wife, Rufina Pablo, were directors of Pablo Realty.

Pablo and Mrs. Pablo had been traveling to California in and prior to 1964, at their own expense, in connection with their private real estate business. Upon their return to Hawaii in early 1964, both Pablo and Mrs. Pablo advised appellant of attractive real estate investment opportunities in California. Appellant's board of directors appointed a subcommittee of four persons, including Pablo and three others who are non-litigants herein, to represent the corporation and go to California to investigate such investments. While in California, agreements were entered into by Pablo on behalf of appellant to purchase two parcels of land. The sellers were represented by separate California real estate brokers who eventually split their commissions from the sellers with Pablo. The trial court found that appellees had had no formal agreements with either of the California selling brokers for any commission splitting prior to the execution of the contracts to purchase the two properties. Pablo did testify, however, in response to questioning by the trial court, that he did expect, as a real estate broker, a commission for his participation in the transactions, and that he was told by one of the selling brokers that he would be paid after the transactions were closed.

After the closing of the escrows, the selling brokers in California paid, as commissions The trial court concluded as follows:

$4,800.00 to Pablo in May, 1964 and $17,594.20 to Pablo Realty in April, 1964. At this time appellant did not know of the receipt of these commissions and did not learn of them until the matter was brought up at a corporate meeting in September, 1964. The actual amounts were not disclosed by Pablo until March, 1965.

'That, although the general rule is that a person who is the president and a director of a corporation is a fiduciary of the corporation and cannot profit from any breach of the fiduciary obligation, nevertheless, under the particular facts of this case, PASTOR A. PABLO, acting for himself and as an officer of PASTOR PABLO REALTY, INC., committed no wrong in accepting the two partial real estate commissions from the California real estate brokers and the court cannot in good conscience compel him to turn those moneys over to the corporation.'

ISSUE

The question on appeal centers around the trial court's construction of the law as applied to the facts in this case. Essentially the issue is whether a corporate officer and director, acting for the corporation in the purchase of investment real estate, can retain a commission received from the real estate brokers representing the sellers, absent disclosure and an agreement with the corporation.

CORPORATE FIDUCIARY-UNDISCLOSED PROFITS

It is widely held that a director while engaged in a transaction for his corporation cannot retain and undisclosed profit. The rule set forth as follows in exemplary of this principle:

Unless otherwise agreed, an agent who makes a profit in connection with transactions conducted by him on behalf of his principal is under a duty to turn over such profits to his principal. This same rule applies with equal force to corporate directors who must account to the corporation for any undisclosed profit regardless of what it is called. Hornstein, Corporation Law and Practice, § 442. 3, Fletcher, Cyclopedia Corporations, § 884, states the rule as follows:

'Directors and other officers of a private corporation cannot either directly or indirectly, in their dealings on behalf the corporation with others, or in any other transaction in which they are under a duty to guard the interests of the corporation, make a profit for themselves, or acquire any other personal benefit or advantage, even though such officer or director may own practically all of the stock of the corporation, and if they do so, they may be compelled to account therefor to the corporation in an appropriate action.' Heit v. Bixby, 276 F.Supp. 217, 225 (E.D.Mo.1967).

The above Bixby case cites as authority 3 Fletcher, Cyclopedia of Corporations (1965). Included in that treatise is a distinctly applicable section to the activity that occurred in the case at hand.

§ 899.-Sales or leases by or to the corporation. A director or other officer or agent will not be permitted to retain profits he may have made in the sale or lease of property by or to his corporation.

The cases in which corporate officers have been held liable for profits, upon this trust principle, have generally arisen where, in the acquisition or disposition of property for the corporation, the officer has received personally a profit, a where he has * * * received a secret bonus or advantage in the transaction in which he has acted for the corporation.

Generally it is held that a director will not be permitted to receive and retain a commission or other secret profit or advantage in the case of a sale or lease or property by or to the corporation.

The Restatement of Restitution, § 197, comment c at 809-810, speaks directly to c. Where no harm to beneficiary. The rule stated in this Section is applicable although the profit received by the fiduciary is not at the expense of the beneficiary. Thus, where an agent to purchase property for his principal acts properly in making the purchase but subsequently receives a bonus from the seller, he holds the money received upon a constructive trust for his principal. The rule * * * is not based on harm done to the beneficiary in the particular case, but rests upon a broad principle of preventing a conflict of opposing interests in the minds of fiduciaries, whose duty it is to act solely for the benefit of their beneficiaries.

the facts of the instant case and explains the rationale of the law in this area:

It is a well established rule both in Hawaii and in a majority of the States that the relation of directors to the corporations they represent is a fiduciary one. Lum v. Kwong, 39 Haw. 532, 538 (1952); Bolte v. Bellina, 15 Haw. 151, 153 (1903). As such, the conduct of Pablo falls sequarely within the above enumerated rule. He was acting solely in his fiduciary capacity as a corporate director when he participated in the transactions from which he received the undisclosed commissions.

DIRECTOR COMPENSATION

Appellees assert that due to the special facts of this case an exception to the general corporate fiduciary rule should be made. It is suggested that since Pablo was...