Kessler v. Jefferson Storage Corporation

• Decision Date: 16 January 1941
• Docket Number: No. 9083,9084.,9083
• Citation: 125 F.2d 108
• Parties: KESSLER et al. v. JEFFERSON STORAGE CORPORATION. JEFFERSON STORAGE CORPORATION v. KESSLER et al.
• Court: U.S. Court of Appeals — Sixth Circuit

125 F.2d 108 (1941)

KESSLER et al. v. JEFFERSON STORAGE CORPORATION.

JEFFERSON STORAGE CORPORATION v. KESSLER et al.

Nos. 9083, 9084.

Circuit Court of Appeals, Sixth Circuit.

January 16, 1941.

John E. Tarrant, of Louisville, Ky. (D. A. Sachs, Jr., John E. Tarrant, and Ogden, Galphin, Tarrant & Street, all of Louisville, Ky., on the brief), for H. M. Kessler, trustee, et al.

David R. Castleman, of Louisville, Ky., for Jefferson Storage Corporation.

Before SIMONS, ALLEN, and McALLISTER, Circuit Judges.

McALLISTER, Circuit Judge.

From partial allowance of a claim filed by the Jefferson Storage Corporation against the bankrupt estate of Dant & Dant of Kentucky, a corporation, the Trustee in Bankruptcy, the storage company, and another creditor, appeal.

The Dant corporation was a distillery whose president was M. C. Ganellin. On December 14, 1936, the corporation, through Ganellin, entered into a storage contract with the Jefferson company. At the same time, the Jefferson company executed a contract with Ganellin, providing for the payment to him of certain profits which the Jefferson company was to realize from the storage contract with the Dant company.

It is claimed by the Trustee in Bankruptcy that the Dant company was ignorant of the execution of the contract between the storage company and Ganellin with regard to payment to him of a share of its profits; that it was a fraudulent, secret agreement; and that, because the storage contract was a part of the same transaction, the whole was tainted with fraud and the storage contract was void. It is therefore contended that the claim in bankruptcy of the Jefferson company, which is based upon the storage contract, should be entirely disallowed.

On behalf of the Jefferson company, it is claimed that, at the time of the execution of the profit agreement with Ganellin, the directors of the Dant company, by corporate resolution, gave approval thereto and were fully advised of its terms. The resolution in question, however, was in indefinite language. It did not mention the contract provisions with regard to profits; and the directors of the Dant company — other than Ganellin — testified they had no knowledge whatever that such profits were to be repaid to Ganellin. The District Court affirmed the findings of the Referee that the agreement as to profits was fraudulent. In spite of uncertainty on this question, arising from the complicated dealings and obscure relationships leading up to the transaction and in the dealings between the two corporations and various individuals, on a review of the record, we are of the opinion that there was substantial evidence to support the conclusion of the District Court.

In its determination, the court found, however, that the Dant company ratified the storage contract with full knowledge of all essential facts. It appears that the Board of Directors of the Dant company, after the execution of the contracts, authorized an audit, and were advised on July 27, 1937, by the auditors, of the terms of the so-called secret agreement. Thereafter, until the ensuing bankruptcy on June 21, 1939, the Dant company recognized on its books its liabilities to the Jefferson company according to the terms of the storage contract. Storage was continued thereafter; storage charges were paid; and no complaint or objection was made during any of this period by the Dant company to either of the contracts. When Ganellin discontinued his association with the distillery in June, 1938, he wrote to the Jefferson company, notifying it that he had assigned to the Dant company all of his rights under any contract which he had with the Jefferson company. The latter promptly advised the Dant company of receipt of notice of this assignment, although there appears to be no record that the Dant company answered such communication. During the period between the time the Dant company had received notice of the so-called secret agreement and the date of bankruptcy, the Dant company carried on an extensive correspondence with the Jefferson company with reference to storage arrangements, based upon the assumption that the storage contract continued to be in effect. If the transaction were voidable, the foregoing circumstances are amply sufficient to show an affirmance by the Dant company.

But it is contended that the secret profit contract was void for fraud, and that the storage contract, being a part of the same transaction, was also void, and incapable of ratification.

It is a well established rule that a contract against public policy cannot be made valid by ratification; and it has been said that where the object or tendency of a contract is to constitute a breach of duty on the part of one who stands in a confidential or fiduciary relation, it is illegal and void, as tending to be, or being, a fraud on third persons. Meguire v. Corwine, 101 U.S. 108, 25 L.Ed. 899; Forsyth v. Woods, 11 Wall. 484, 485, 20 L.Ed. 207; Horbach v. Coyle, 8 Cir., 2 F.2d 702; Davezac v. Seiler, 12 Ky.Law Rep. 599; Young v. Evans, 8 Ky.Law Rep. 353. Not only is it stated that such agreements are against the public policy of securing faithful discharge of duties by persons holding positions of trust and confidence, but agreements tending to cause unfaithful conduct by fiduciaries are illegal because they are, in effect, agreements to wrong or defraud persons whose interest the fiduciaries have in charge; Maine Northwestern Development Co. v. Northern Commercial Co., D.C., 213 F. 103; and contracts which tend to induce an officer of a corporation to act unlawfully or in disregard of the interests of the corporation, are of this nature and are invalid. Wardell v. Union Pacific R. Co., 103 U.S. 651, 26 L.Ed. 509; Horbach v. Coyle, supra; Berryman v. Cincinnati Southern Ry., 14 Bush. 755, 77 Ky. 755.

Ganellin's contract with the Jefferson company, that he was to be repaid from its profits, which were to be realized from payments made by the company of which Ganellin was president, was found to be a fraud upon the Dant company. The trial court held that the entire transaction, consisting of the storage contract and the profits agreement, was voidable, rather than void, on the ground that where a contract is made by an agent, in the name of his principal, in which a secret profit, not known to or acquiesced in by the principal, inures to the agent, it is voidable on the part of the principal upon discovery of the facts, citing Wardell v. Union Pacific R. Co., 103 U.S. 651, 26 L.Ed. 509; Thomas, Trustee, v. Brownville, etc., R. Co., 109 U.S. 522, 3 S.Ct. 315, 27 L.Ed. 1018; Bank of Louisville v. Gray, 84 Ky. 565, 2 S.W. 168; Johnson v. Mitchell, 192 Ky. 444, 233 S.W. 884; Louisville Point Lumber Co. v. Thompson, 202 Ky. 263, 259 S.W. 345. See Twin-Lick Oil Co. v. Marbury, 91 U. S. 587, 23 L.Ed. 328; Hoyt v. Latham, 143 U.S. 553, 12 S.Ct. 568, 36 L.Ed. 259. Appellant trustee urges that the cases relied upon by the court are inapplicable; and insists that the entire transaction was void and could not be ratified.

We are required, however, only to decide whether the storage contract was valid. It is held that where the consideration of a contract is valid and several promises are based upon it, some of which are legal and others illegal, so that they may be separated, the legal ones will be enforced, while those...