Olney v. Conanicut Land Co.

• Decision Date: 10 August 1889
• Parties: OLNEY et al. v. CONANICUT LAND CO. et al.
• Court: Rhode Island Supreme Court

18 A. 181

16 R.I. 597

OLNEY et al.

v. CONANICUT LAND CO. et al.

Supreme Court of Rhode Island.

Aug. 10, 1889.

Bill by Lizzie F. Olney and others against the Conanicut Land Company and others, to annul a mortgage, and for a receiver.

Daniel R Ballou and Frank H. Jackson, for complainants. Darius Baker and Rathbone Gardner, for respondents.

STINESS, J. The complainants, judgment creditors of the Conanicut Land Company, seek to set aside a mortgage given to the defendants Lippitt, Davis, and Bradford to secure them for advances, and for their indorsements of the notes of the company. The mortgage was given immediately after the complainants had brought suits for damages against the company for negligence, and when the company was insolvent; the agreed statement of facts showing that it had not sufficient assets with which to discharge all its outstanding indebtedness were payment of the same to be demanded when due. Since then the complainants have levied executions on the property of the company. The complainants claim that, as the mortgagees are three of the four directors who voted to give the mortgage, thereby securing themselves, their action is so inconsistent with their fiduciary relation that it should be set aside. No fraudulent act in regard to the giving of the mortgage is alleged other than the fact itself, and, the case being submitted on bill, answer, and agreed facts as to the validity of the mortgage, we have the simple question whether directors of an insolvent corporation are debarred in equity, by virtue of their positions, from preferring debts due to themselves. In so far as the mortgage is to be regarded as a mere preference, it is not contended that it is invalid. Except as limited by statute, the right of a debtor to prefer a part of his creditors has always been upheld in this state. Dockray v. Dockray, 2 K. I. 547; Elliott v. Benedict, 13 R. I. 463. The vital question is whether a director of an insolvent corporation is to be regarded as a trustee for its creditors. If he is so, the duty of a trustee to a cestui que trust is plain. For a trustee to collect his own debt, to the detriment of that of his cestui, is a clear breach of fidelity. When one accepts the trust of caring for another's interest, he accepts the attendant duty. It must be admitted that directors of a corporation are not technical trustees. They do not have, in themselves, the title to property which they hold for the benefit of others; and, certainly as to creditors, they are under no express trust. The corporation is a legal being, distinct from its stockholders and officers. It may deal with them as individuals, and may owe them debts. It holds its own property, and has the capacity and responsibility of acting for itself. Nevertheless, the conduct of its affairs must, of necessity, be intrusted to officers in whom confidence is reposed, to whom large powers are given, and by whom its property is managed for the common benefit. As corporations have multiplied and have become so greatly concerned in business affairs in recent years, the obligations arising from such a relation have become correspondingly prominent. While the decisions in regard to this relation are not harmonious, it has been generally agreed that directors are trustees for stockholders. This being established, we think it follows naturally that, where the corporation becomes insolvent, and the stockholders have no longer a substantial interest in the property of the corporation, directors should be regarded as trustees of the creditors to whom the property of the corporation must go. If directors, with their office, assume the duty of caring for the interests of stockholders, why do they not also assume the duty, incidentally, of caring for the interest of those who, instead of the stockholders, may come to have claims upon the corporate property?

In speaking of directors as trustees for stockholders, Mr. Justice MILLER, in Sawyer v. Hoag, 17 Wall. 610, calls this "a doctrine of modern date;" but as long ago as the time of Lord HARDWICKE we find the duties and obligations of a director of a corporation thus clearly set forth: "I take the employment of a director to be of a mixed nature. It partakes of the nature of a public office, as it arises from the charter of the crown. But it cannot be said to be an employment affecting the public government. * * * Therefore committee-men are most properly agents to those who employ them in this trust, and who empower them to direct and superintend the affairs of the corporation. * * * By accepting of a trust of this sort, a person is obliged to execute it with fidelity and reasonable diligence, and it is no excuse to say that they had no benefit from it, but that it was merely honorary; and therefore they are within the case of common trustees." Corporation v. Sutton, 2 Atk. 400. To the effect that officers of a corporation are trustees for stockholders, see Hodges v. Screw Co., 1 R. I. 312; Hoyle v. Railroad Co., 54 N. Y. 314; Koehler v. Iron Co., 2 Black, 715; Railway Co. v. Hudson, 16 Beav. 485, 19 Eng. Law & Eq. 361; Railway Co. v. Magnay, 25 Beav. 586; Hope v. Salt Co., 25 W. Va. 789. Indeed, no cases that we know of deny a fiduciary relation of directors to stockholders, however they may differ in the use of terms todescribe it. Tin's relation has led logically to the conclusion that, in case of insolvency, the assets of the corporation being no longer held for the benefit of stockholders, but for the benefit of creditors, the directors owe to the creditors the duty of a trustee. This duty is clearly stated by CLIFFORD, J., in Bradley v. Converse, 4 Cliff. 375: "Assets of an incorporate company are regarded in equity as held in trust for the payment of the debts of the corporation, and courts of equity will enforce the execution of such trusts in favor of creditors, even when the matter in controversy may not be cognizable in a court of law. Such assets are usually controlled and managed by directors or trustees, but courts of equity will not permit such managers, in dealing with the trust-estate, in the exercise of the powers of their trust to obtain any undue advantage for themselves, to the injury or prejudice of those for whom they are acting in a fiduciary relation. Exact equality of benefit may be enjoyed, but the trustees are forbidden to protect, indemnify, or pay themselves at the expense of those who are similarly in relation to the same fund." To the same effect are Bradley v. Farwell, 1 Holmes, 433; Jackson v. Ludeling, 21 Wall. 616; Corbett v. Woodward, 5 Sawy. 403; Stout v. Milling Co., 13 Fed. Rep. 802; Haywood v. Lumber Co., 64 Wis. 639, 26 N. W. Rep. 184; Richards v. Insurance Co., 43 N. H. 263; Railroad Co. v. Bee, 48 Cal. 398; Hopkins' Appeal, 90 Pa. St. 69; Improvement Co. v. Terrell, L. R. 10 Eq. 168. Of the cases cited by the defendants, only three fully sustain their claim that, as creditors of the company, directors may, in the absence of fraud, secure themselves for their own debt, viz., Burr's Ex'r v. McDonald, 3 Grat. 216; Bank v. Whittle, 78 Va. 737; Garrett v. Plow...