Opinion
Argued January 9, 1900
Decided February 6, 1900
G.D.B. Hasbrouck, William H. Gibson and Eugene Lamb Richards, Jr., for appellants.
Edward B. Hill for Edmund C. Converse et al., respondents. John M. Bowers and L.G. Reed for Hugh J. Grant, as receiver, respondent.
The appellants argue that there was error in the findings of the trial court with respect to the circumstances under which these loans were made. The unanimous affirmance by the Appellate Division, however, has conclusively established all the questions of fact in this case. It is not open to us to review the evidence to discover whether the $60,000 were loaned to the company honestly, and upon the faith of the securities pledged; or whether it was, as the appellants claim, in the nature of a subscription to some funding plan. Nor can we review it to discover whether the directors who loaned their moneys had actual knowledge of the insolvency of the company, or not; if that is a material circumstance, as seems further to be claimed. The argument was made for the appellants, as I understand it, that, as these directors were the managing agents of the company, they were chargeable with knowledge of the condition of the company and, therefore, were bound to know its hopelessly insolvent condition; that they had no right by loaning moneys to protract the insolvent condition of the company and to create new and different liabilities, which would enable them to become creditors and to appropriate the company's assets; and that, as trustees for its creditors and stockholders, upon its insolvency, it was their duty, and it was the policy of the law, to have its affairs promptly wound up. No case is cited in support of the argument that this arrangement, by which persons, who were directors of the company, loaned moneys to it upon the pledge of securities, in order to preserve its credit and to tide over its difficulties, was against public policy and I am unable to agree with it. To the contrary, the adjudged cases support such a transaction between the directors and the company, provided it was fair and in good faith. These elements are established in this case. In Twin-Lick Oil Company v. Marbury ( 91 U.S. 587) it was held that there was no rule forbidding a director "from loaning money to the corporation, when the money is needed, and the transaction is open and otherwise free from blame." Such a doctrine, it was said, would deprive the corporation "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 might be safely given." In that case, the loan was by a director of the company when it was in an embarrassed condition and a deed of trust, covering all the corporate property, was given to secure the company's note. Upon default, the property was sold and the defendant bought in the property. It was charged that he had abused his trust relation, to take advantage of the company and to buy in its property at a sacrifice. The bill was filed to have a decree that the defendant held as trustee for the company and for an accounting, etc.; but the decree dismissing it was affirmed. In Sandford Fork Tool Co. v. Howe, Brown Co. ( 157 U.S. 312), it was observed by Mr. Justice BREWER, that "it is going too far to hold that a corporation may not give a mortgage to its directors, who have loaned their credit to it, to induce a continuance of the loan of that credit, at a time when the corporation, though not in fact possessed of assets equal to its indebtedness, is a going concern, and is intending and expecting to continue in business."
In Duncomb v. N.Y., H. N.R.R. Co., ( 88 N.Y. 1), the president of the company had advanced moneys to it, when embarrassed, to enable it to complete its road, and, subsequently, under a resolution of the executive committee of the board of directors, bonds of the company were pledged with him as security for his claim. It was held that there was no authority for the doctrine that directors cannot transfer property to secure an honest and bona fide debt, and the distinction was adverted to that the president had attempted no fraud and had sought no improper or undue advantage in the transaction. I am not aware of any principle of law which would avoid an honest transaction between a director and his company, conducted openly and having as its motive some presumable benefit to the corporation. The fact that it is with a director will impose the necessity of a closer scrutiny and, by reason of his position of trust and agency, his conduct must appear to have been for the company's interest and above-board.
In this case, the directors, who advanced their moneys to aid the company in its crippled condition, did so after a general conference of persons, who were interested in it; in an honest belief and expectation that the company, as a going concern, might be tided over its embarrassments, as it had been represented to be possible by an investigating committee, and without any personal advantage taken. Indeed, it is difficult to see how, and I do not understand it to be claimed, that any benefit could result to them; except so far as, by preserving the company from immediate failure, their interests in the company might be eventually saved. But that was a consideration which was common to all who, as stockholders, were interested in the company, and these four persons, in coming to the relief of the corporation, appear, rather, to have acted disinterestedly. In fact, they were losers in the transaction from the inadequacy of the security. The claim of any neglect of duty on the part of the directors has no real relevancy to this controversy; for, if it existed, any one, able to prove injury therefrom, has an adequate legal remedy.
Nor should the distinction be lost sight of, that the assignment of the directors in pledge to the plaintiff was to secure present loans, agreed to be made upon the faith of the pledge, and that it was, in nowise, to secure the payment of some precontracted debt; which might entail the condemnation of the law, as a transfer of corporate property for the purpose of giving a preference to certain of its creditors. I am quite unable to perceive how any policy of the law of this state is violated by upholding these transactions with the company. "Public policy" is often resorted to as a term to conjure with and its vague use is, not infrequently, relied upon to support claims, which, as in the present case, are not in accord with the common, or moral, sense. Judge BURROUGH, in Richardson v. Mellish, (2 Bing. C.P. 229), speaking in reference to the claim that the agreement there was illegal, because against public policy, protested "against arguing too strongly upon public policy; it is a very unruly horse and when once you get astride of it you never know where it will carry you. It may lead you from the sound law."
That the director of a company is chargeable in law with a knowledge of its actual condition may be true; but in adjudging the consequences to follow upon a dealing with the company, in good faith, for its supposed benefit, and without personal advantage taken, the fact of his actual ignorance should have a determining importance. When the nature and quality of his act are to receive their coloring from the facts, the absence of the fact of actual knowledge of the company's insolvency, which might render the transaction an unwise or impolitic one, must be a determining element. In short, the honesty of the intention and the absence of any attempt to oppress, or to overreach, or to gain some undue advantage, should weigh in favor of such a transaction had by a director with his company, in its interest and where he simply sought to secure himself against resulting loss.
It is inconceivable that the plaintiff and his associates should have loaned their moneys to the company, with the knowledge that its condition was one of hopeless insolvency, and the fact has been found the other way; as it could not well have been otherwise found upon the evidence. For these reasons, as for those which were well expressed by Mr. Justice PATTERSON, at the Appellate Division, the judgment appealed from should be affirmed, with costs.
PARKER, Ch. J., O'BRIEN, BARTLETT, HAIGHT, MARTIN and VANN, JJ., concur.
Judgment affirmed.