1. A director of a corporation is not prohibited from lending it
moneys when they are needed for its benefit and the transaction is
open and otherwise free from blame, nor is his subsequent purchase
of its property at a fair public sale by a trustee, under a deed of
trust executed to secure the payment of them, invalid.
2. The right of a corporation to avoid the sale of its property
by reason of the fiduciary relations of the purchaser must be
exercised within a reasonable time after the facts connected
therewith are made known or can by due diligence be ascertained. As
the courts have never prescribed any specific period as applicable
to every case like the statute of limitations, the determination as
to what constitutes a reasonable time in any particular case must
be arrived at by a consideration of all its elements which affect
that question.
3. The property in controversy in the present suit had been
appropriated and used for the production of mineral oil from wells,
a species of property which is, more than any other, subject to
rapid, frequent, and extreme fluctuations in value. The director
who bought it committed no actual fraud, and the corporators knew
at the time of his purchase all the facts upon which their right to
avoid it depended. They refused to join him in it, or to pay
assessments then made on their stock, and it was nearly four years
thereafter when the hazard was over, and his skill, energy, and
money had made his investment profitable, that any claim to, or
assertion of right in, the property was made by the corporation or
the stockholders.
Held that the court below properly
dismissed tire bill of complaint of the corporation, praying that
the purchaser should be decreed to hold as its trustee, and to
account for the profits during the time he had the property.
Mr. JUSTICE MILLER delivered the opinion of the Court.
The appellant here, complainant below, was a corporation
organized under the laws of West Virginia, engaged in the business
of raising and selling petroleum. It became very much embarrassed
in the early part of 1867, and borrowed from the defendant the sum
of $2,000, for which a note was given, secured by a deed of trust,
conveying all the property, rights, and franchises of the
corporation to William Thomas, to secure the payment of said note,
with the usual power of sale in default of payment. The property
was sold under the deed
Page 91 U. S. 588
of trust, was bought in by defendant's agent for his benefit,
and conveyed to him in the summer of the same year. The defendant
was, at the time of these transactions, a stockholder and director
in the company, and the bill in this case was filed in April, 1871,
four years after, to have a decree that defendant holds as trustee
for complainant, and for an accounting as to the time he had
control of the property. It charges that defendant has abused his
trust relation to the company to take advantage of its difficulties
and buy in at a sacrifice its valuable property and franchises;
that, concealing his knowledge that the lease of the ground on
which the company operated included a well, working profitably, and
by promises to individual shareholders that he would purchase in
the property for the joint benefit of the whole, he obtained an
unjust advantage and in other ways violated his duty as an officer
charged with a fiduciary relation to the company. As to all this,
which is denied in the answer and as to which much testimony is
taken, it is sufficient to say that we are satisfied that the
defendant loaned the money to the corporation in good faith and
honestly to assist it in its business in an hour of extreme
embarrassment, and took just such security as any other man would
have taken; that when his money became due and there was no
apparent probability of the company paying it at any time, the
property was sold by the trustee and bought in by defendant at a
fair and open sale and at a reasonable price; that, in short, there
was neither actual fraud nor oppression, no advantage was taken of
defendant's position as director, or of any matter known to him at
the time of the sale, affecting the value of the property, which
was not as well known to others interested as it was to himself,
and that the sale and purchase was the only mode left to defendant
to make his money.
The first question which arises in this state of the facts is
whether defendant's purchase was absolutely void.
That a director of a joint stock corporation occupies one of
those fiduciary relations where his dealings with the subject
matter of his trust or agency, and with the beneficiary or party
whose interest is confided to his care, is viewed with jealousy by
the courts and may be set aside on slight grounds, is a doctrine
founded on the soundest morality and which has received
Page 91 U. S. 589
the clearest recognition in this Court and in others.
Koehler v. Black River Falls
Iron Co., 2 Black 715;
Drury v.
Cross, 7 Wall. 299;
Luxemburg R. Co. v.
Maquay, 25 Beav. 586;
Cumberland Co. v. Sherman, 30
Barb. 553; 16 Md. 456. The general doctrine, however, in regard to
contracts of this class is not that they are absolutely void, but
that they are voidable at the election of the party whose interest
has been so represented by the party claiming under it. We say this
is the general rule, for there may be cases where such contracts
would be void
ab initio, as when an agent to sell buys of
himself, and by his power of attorney conveys to himself that which
he was authorized to sell. But even here acts which amount to a
ratification by the principal may validate the sale.
The present case is not one of that class. While it is true that
the defendant, as a director of the corporation, was bound by all
those rules of conscientious fairness which courts of equity have
imposed as the guides for dealing in such cases, 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 actual 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.
There are in such a transaction three distinct parties whose
interest is affected by it -- namely the lender, the corporation,
and the stockholders of the corporation.
The directors are the officers or agents of the corporation, and
represent the interests of that abstract legal entity, and of those
who own the shares of its stock. One of the objects of creating a
corporation by law is to enable it to make contracts, and these
contracts may be made with its stockholders as well as with others.
In some classes of corporations, as in mutual insurance companies,
the main object of the Act of incorporation is to enable the
company to make contracts with its stockholders or with persons who
become stockholders by the very act of making the contract of
insurance. It is very true that as
Page 91 U. S. 590
a stockholder, in making a contract of any kind with the
corporation of which he is a member, is in some sense dealing with
a creature of which he is a part and holds a common interest with
the other stockholders who with him constitute the whole of that
artificial entity, he is properly held to a larger measure of
candor and good faith than if he were not a stockholder. So when
the lender is a director, charged, with others, with the control
and management of the affairs of the corporation, representing in
this regard the aggregated interest of all the stockholders, his
obligation, if he becomes a party to a contract with the company,
to candor and fair dealing, is increased in the precise degree that
his representative character has given him power and control
derived from the confidence reposed in him by the stockholders who
appointed him their agent. If he should be a sole director or one
of a smaller number vested with certain powers, this obligation
would be still stronger, and his acts subject to more severe
scrutiny, and their validity determined by more rigid principles of
morality and freedom from motives of selfishness. All this falls
far short, however, of holding that no such contract can be made
which will be valid, and we entertain no doubt that the defendant
in this case could make a loan of money to the company; and as we
have already said that the evidence shows it to have been an honest
transaction for the benefit of the corporation and its
shareholders, both in the rate of interest and in the security
taken, we think it was valid originally, whether liable to be
avoided afterwards by the company or not.
If it be conceded that the contract by which the defendant
became the creditor of the company was valid, we see no principle
on which the subsequent purchase under the deed of trust is not
equally so. The defendant was not here both seller and buyer. A
trustee was interposed who made the sale, and who had the usual
powers necessary to see that the sale was fairly conducted, and who
in this respect was the trustee of the corporation, and must be
supposed to have been selected by it for the exercise of this
power. Defendant was at liberty to bid, subject to those rules of
fairness which we have already conceded to belong to his peculiar
position, for if he could not bid he would have been deprived of
the only means which his
Page 91 U. S. 591
contract gave him of making his debt out of the security on
which he had loaned his money. We think the sale was a fair one.
The company was hopelessly involved beside the debt to defendant.
The well was exhausted, to all appearance. The machinery was of
little use for any other purpose, and would not pay transportation.
Most of the stockholders who now promote this suit refused to pay
assessments on their shares to aid the company. Nothing was left to
the defendant but to buy it in, as no one would bid the amount of
his debt.
The next question to be decided is whether under the
circumstances of this case the complainant had a right to avoid
this sale at the time this suit was brought.
The bill alleges that both prior to the sale and since, the
defendant made various declarations to other stockholders to the
effect that he only designed to purchase the property for the
benefit of all or a part of the stockholders, and there is some
testimony to show that after the sale he did propose that if his
debt was paid by the company or the shareholders, he would
relinquish his purchase.
But we need not decide whether any of these declarations raised
a legal obligation to do so or not, nor whether, without such
declarations, the sale and deed were voidable at the election of
the complainant -- a proposition which is entitled to more
consideration, resting solely on the fiduciary relations of the
defendant to the plaintiffs, than on the evidence in this case of
the declarations alluded to.
We need not decide either of these propositions because
plaintiff comes too late with the offer to avoid the sale.
The doctrine is well settled that the option to avoid such a
sale must be exercised within a reasonable time. This has never
been held to be any determined number of days or years as applied
to every case, like the statute of limitations, but must be decided
in each case upon all the elements of it which affect that
question. These are generally the presence or absence of the
parties at the place of the transaction, their knowledge or
ignorance of the sale and of the facts which render it voidable,
the permanent or fluctuating character of the subject matter of the
transaction as affecting its value, and the actual
Page 91 U. S. 592
rise or fall of the property in value during the period within
which this option might have been exercised.
In fixing this period in any particular case, we are but little
aided by the analogies of the statutes of limitation, while, though
not falling exactly within the rule as to time for rescinding or
offering to rescind a contract by one of the parties to it for
actual fraud, the analogies are so strong as to give to this latter
great force in the consideration of the case. In this class of
cases, the party is bound to act with reasonable diligence as soon
as the fraud is discovered, or his right to rescind is gone. No
delay for the purpose of enabling the defrauded party to speculate
upon the chances which the future may give him of deciding
profitably to himself whether he will abide by his bargain, or
rescind it, is allowed in a court of equity.
In the recent case of
Upton, Assignee v. Tribilcock,
supra, p.
91 U. S. 45, it was
held that the purchaser of stock in an insurance company, who had
offered to rescind within two or three months because his note had
been sent to a bank for collection in fraud of the agreement to the
contrary, could not avail himself of that offer to let in as
defense other fraudulent representations then unknown to him when
he was sued by the assignee in bankruptcy for the unpaid
installments on that stock after the bankruptcy of the company.
The authorities to the point of the necessity of the exercise of
the right of rescinding or avoiding a contract or transaction as
soon as it may be reasonably done after the party with whom that
right is optional is aware of the facts which give him that option
are numerous and well collected in the brief of appellees' counsel.
The more important are as follows:
Badger v.
Badger, 2 Wall. 87;
Harwood v.
R. Co., 17 Wall. 78;
Marsh v.
Whitman, 21 Wall. 178;
Vigers v. Pike, 8
Cl. & Fin. 650;
Wentworth v. Lloyd, 32 Beav. 467;
Follansbee v. Kilbreth, 17 Ill. 522.
The cases of
Bliss v. Edmonson, 8 DeG. M. & G. 787,
Prendergast v. Turton, 1 You. & Coll., while asserting
the same general doctrine, have an especial bearing on this case,
because they relate to mining property.
The fluctuating character and value of this class of property is
remarkably illustrated in the history of the production of mineral
oil from wells. Property worth thousands today is
Page 91 U. S. 593
worth nothing tomorrow, and that which would today sell for a
thousand dollars as its fair value, may, by the natural changes of
a week or the energy and courage of desperate enterprise, in the
same time be made to yield that much every day. The injustice
therefore is obvious of permitting one holding the right to assert
an ownership in such property to voluntarily await the event, and
then decide, when the danger which is over has been at the risk of
another, to come in and share the profit.
While a much longer time might be allowed to assert this right
in regard to real estate whose value is fixed, on which no outlay
is made for improvement and but little change in value, the class
of property here considered, subject to the most rapid, frequent,
and violent fluctuations in value of anything known as property,
requires prompt action in all who hold an option, whether they will
share its risks or stand clear of them.
The case before us illustrates these principles very forcibly.
The officers, and probably all the stockholders, who were not
numerous, knew of the sale as soon as made. As there was no actual
fraud, they knew all the facts on which their right to avoid the
contract depended. They not only refused to join the defendant in
the purchase when that privilege was tendered them, but they
generally refused to pay assessments on their shares already made
which might have paid this debt.
The defendant then had a survey made of the ground leased to the
corporation, the lease being the main thing he had acquired by the
sale. When the lines were extended, the lease was found to embrace
a well, then profitably worked by another company. Of this piece of
good luck he availed himself, and by suit and compromise he
obtained possession of that well. He put more of his money into it,
and changed what had been a disastrous speculation by the company
into a profitable business. With full knowledge of all these facts,
the appellant took no action until this suit was brought, nearly
four years after the sale, and not until all the hazard was over,
and the defendant's skill, energy, and money had made his purchase
profitable, was any claim or assertion of right in the property
made by the corporation or by the stockholders.
We think, both on authority and principle -- a principle
Page 91 U. S. 594
necessary to protect those who invest their capital and their
labor in enterprises useful but hazardous -- that we should hold
that plaintiff has delayed too long.
Decree affirmed.