Opinion
No. 43785.
February 28, 1966.
Appeal from the Circuit Court, Hinds County, M.M. McGowan, J.
Bernard W.N. Chill, Jackson, for appellant.
Walter Gex, III, Satterfield, Shell, Williams Buford, Jackson, for appellee.
Dr. Lloyd Berrong, M.D., John Felix Miller, pharmacist, and Lee L. Cameron, pharmacist, each invested $3,000 in a small corporation known as Cooper Drugs, Inc., which corporation owned and operated two drug stores, one on Cooper Road in Jackson, Mississippi, and one at Plain, Mississippi. Miller operated the Cooper Road Drug Store, and Cameron operated the drug store at Plain. Berrong, Miller and Cameron were officers and directors of the corporation, and also its only stockholders.
Cooper Drugs, Inc., fell on hard times, and the Director of Internal Revenue gave notice of a public auction sale to be held on February 27, 1961, for the sale of the assets of the corporation to satisfy unpaid and delinquent federal taxes.
On February 24, 1961, A.L. Saunders, Jr., pharmacist, an employee of Cooper Drugs, Inc., approached John Felix Miller about them purchasing the assets of the corporation at the public sale on February 27, 1961. Saunders suggested to Miller that they see Dr. Berrong and offer him $3,000, the amount of his investment in the corporation, if he would not bid against them at the public sale. As a result of a conference with Dr. Berrong, an agreement was drawn by the attorneys representing all parties and signed by Saunders and Miller on February 24, 1961, which agreement provided:
"WHEREAS, Dr. Lloyd G. Berrong is and has been a stockholder as well as member of the Board of Directors of Cooper Drugs, Inc., a Mississippi Corporation, domiciled in the First Judicial District of Hinds County, Mississippi, and has invested $3,000.00 in the stock of said corporation; and
"WHEREAS, the said Cooper Drugs, Inc., has become financially insolvent and a tax lien through the District Director of Internal Revenue has been imposed upon the assets of said Cooper Drugs, Inc., and said District Director of Internal Revenue proposes to sell the assets of said Cooper Drugs, Inc., at public auction on or about the 27th day of February, 1961; and
"WHEREAS, the undersigned, John Felix Miller, and the undersigned, A.L. Saunders, Jr., acting by and through their attorney, Will S. Wells, desire to seek to purchase the assets of the said Cooper Drugs, Inc., at such sale and have requested the said Dr. Lloyd G. Berrong to refrain from bidding against them for such assets.
"NOW, THEREFORE, in consideration of the withholding by the said Dr. Lloyd Berrong of bidding against said parties or others in connection with the distress sale hereinabove described and in consideration of $10.00, cash in hand paid and other good and valuable considerations, the receipt and sufficiency of all of which is hereby acknowledged, we, the undersigned, do hereby jointly and severally agree that within the next thirty-six months from the date hereof and on or before the 24th day of February, 1964 we will pay to the said Dr. Lloyd Berrong the sum of $3,000.00.
"In the event that we default in the payment of the said sum of $3,000.00, we agree that the said $3,000.00 shall bear interest from maturity at the rate of 8% per annum.
"WITNESS OUR SIGNATURES, on this the 24th day of February, 1961." (Emphasis added.)
The crowd at the public sale was estimated as high as 200 people, and there was active bidding for the different classes of property. There were even two or three bids for the property as a whole. A.L. Saunders, Jr. was the successful bidder at $4,950.00.
About a year later, on February 21, 1962, John Felix Miller executed a release and conveyance to A.L. Saunders, Jr. wherein Miller sold and conveyed his interest in the store fixtures, stock of merchandise and accounts receivable of Cooper Road Drug Store to Saunders. The consideration for the release and conveyance was $1,000 cash, the assumption by A.L. Saunders, Jr. of a $2,000 indebtedness of Miller to the First Federal Savings and Loan Association, and "* * * the assumption by the said A.L. Saunders, Jr., of an indebtedness of Three Thousand Dollars ($3,000) owing Dr. Lloyd G. Berrong as evidenced by an agreement executed by the undersigned, John Felix Miller, and the said A.L. Saunders, Jr. on or about March 29, 1961 * * *."
A.L. Saunders, Jr., also signed and acknowledged this release and conveyance before a notary public and immediately above his signature is this statement:
"The foregoing release and conveyance and the obligations therein contained are herewith accepted."
After the note contained in the agreement of February 24, 1961, became due, repeated demands were made by the plaintiff, both orally and in writing, to both Saunders and Miller, for the payment of this note. Finally on May 1, 1964, suit was filed in the County Court of the First Judicial District of Hinds County, and the defendants, Saunders and Miller, filed their answers denying the validity of the agreement, and asserting for the first time the affirmative defense that the agreement was void because it violated the public policy of the State in that it was an agreement to withhold or stifle free bidding and was designed to "chill the sale."
This affirmative defense was denied by the plaintiff, and the matter proceeded to trial on the issues as joined. The jury in the county court returned a verdict for the plaintiff, Dr. Berrong, and judgment accordingly was entered against Saunders and Miller.
This judgment for $3,000, plus interest and court costs, was appealed by Saunders, only, to the Circuit Court. The Circuit Judge in a written opinion affirmed the judgment of the lower court, and the appellant, Saunders, then prosecuted an appeal to this Court.
The only question involved is whether the agreement sued on is against the public policy of the State because it stifles or chills bids at a public sale.
In his opinion affirming the judgment of the County Court, Judge McGowan said:
"This case is ruled by the case of Granberry [Grandberry] vs Mortgage Bond Trust Company, [ 159 Miss. 460] 132 So. 334 et seq.
"All of the parties involved in the agreement out of which the suit grew were parties in interest. If the suit brought here had been brought by some general creditor of the corporation who claimed that the arrangement complained of had worked an injustice or loss to him the situation might be different.
"In the argument and briefs much emphasis was placed upon the question of whether or not the stockholders owned a portion of the corporation's properties. Whatever the result of this contention might be if pursued, the conclusion is evident that the parties in this suit were parties in interest, whether or not either could establish right to any specific property.
"Under the facts here I think the Granberry [Grandberry] case controls, and the judgment is affirmed."
In Grandberry et al. v. Mortgage Bond Trust Co., 159 Miss. 460, 132 So. 334 (1931), the Supreme Court was called upon to decide whether or not an agreement between the owners of a third deed of trust on a certain parcel of land and the owner of a second deed of trust whereby the owners of the third deed of trust agreed not to bid at the foreclosure sale in return for a guaranteed lesser amount to be paid for their third deed of trust was valid and enforceable. The appellants in this case, relying on the assurance of the appellee, did not attend the sale and, of course, did not bid on the property being sold. The second deed of trust holder was the only bidder at the sale and bid for the property an amount substantially less than that which he had agreed to. The holder of the second deed of trust immediately took possession and began remodeling the premises and repudiated its agreement with the third deed of trust holders on the alleged grounds that the agreement, being oral, was not enforceable under the statute of frauds, and on the further ground asserted that the agreement was in controvention of the law in relation to the chilling of bids. The Court, speaking through Justice Griffith, in passing on the latter ground, said:
"As to the second ground, it is enough to say that `persons who by virtue of liens or otherwise have an existing interest in the property to be sold may lawfully combine together for the protection of their interests and may even expressly agree not to bid against each other, in the furtherance of a plan to conserve their rights, providing their activities in so doing do not operate to exclude any of the general public from bidding.'" 35 C.J. p. 41. See, also, Starkweather v. Jenner, 216 U.S. 524, 529, 30 S.Ct. 382, 54 L.Ed. 602, 605, 17 Ann.Cas. 1167." (Emphasis added.) 159 Miss. at 467, 132 So. at 335.
While the Grandberry case involved an agreement between lienholders only, the persons who might lawfully combine to protect their interests are not limited to lienholders. The Court in the Grandberry case specifically extended the umbrella of the law to cover "* * * `persons who * * otherwise have an existing interest in the property to be sold may lawfully combine together for the protection of their interests and may even expressly agree not to bid against each other, * * *." (Emphasis added.)
The only prohibition is that the activities of those interested in protecting their rights do not operate to exclude any of the general public from bidding. The testimony is uncontradicted that the appellee did not discourage any one from bidding at the sale, and the agreement itself certainly does not prohibit or exclude any of the public from bidding.
The conclusion reached by the Supreme Court of Mississippi in the Grandberry case, supra, is supported by a long line of decisions in other states.
One of the landmark cases, cited many times, is Spokane Savings Loan Soc. v. Park Vista Improvement Co. et al., 160 Wn. 12, 294 P. 1028 (1930). In that case the court was faced with a controversy between junior incumbrancers, the appellants on the one side as holders of laborers' and materialmen's liens, and the appellee on the other side as a second mortgagee. The contract in question was an agreement by the appellee to purchase the prior liens of some of the appellants in order to protect appellee's interest in the mortgaged property. The Court, in passing on the question as to whether the agreement or contract in question did in truth and in fact "chill the sale" and consequently was void as against public policy, had the following to say:
"`The early rule of law condemned without discrimination all agreements between persons not to bid at judicial or public sales. This rule has, however, been modified, and it is now well settled in this state that, where such agreements are made for an honest purpose, and designed to protect existing interests, they are valid. The question as to whether the agreement in such a case was entered into with honest motives is for the jury to determine. * * "* * * an agreement made by parties, one or more of whom has a lien upon, or an interest in, the property about to be disposed of at a public or judicial sale, is not against public policy, because it has the effect to prevent competition at such sale, provided it was made, not with the intent of producing that effect, but was fairly made to protect the lien or interest of the parties, or for any other reasonable and lawful purpose." * * * "And if either party contracts in good faith, he is entitled to the benefit of his contract, no matter what may have been the secret purpose or intention of the other."' Delisi v. Ficarrotta, 76 Misc. Rep. 488, 135 N.Y.S. 653, 655." (Emphasis added.)
"There was no agreement to endeavor to keep the general public from bidding. Though Dalk and Truax agreed not to bid at the sheriff's sale, that of itself would not be sufficient to render the contract illegal. The rule against chilling bids at a judicial sale does not require the lien creditors of a mortgagor to bid against each other. Lien creditors may lawfully combine, so long as the combination only incidentally affects competition at a judicial sale and does not have the restriction of competition for its main object, and so long as the parties to the combination do not agree to keep the general public from bidding."
"The qualification of the rule is stated as follows in the latter part of section 53, p. 41, vol. 35, C.J.:
"`Persons who, by virtue of liens or otherwise, have an existing interest in the property to be sold may lawfully combine together for the protection of their interests and may even expressly agree not to bid against each other, in furtherance of a plan to conserve their rights, provided their activities in so doing do not operate to exclude any of the general public from bidding; * * *.'"
In Investment Registry, Limited v. Chicago M. Electric R. Co. et al., 206 F. 488, 492 (N.D.Ill. 1930), the Court said:
"The general rule is that the public shall be free to bid for property offered at a judicial sale, and the law prohibits the making of any bargain or the doing of any thing which takes from any part of the public this liberty of action. The term `general public,' however, as used in this connection, does not include `persons who, by virtue of lien or ownership or otherwise, have an existing interest in the property to be sold.' Such persons may combine together for the protection of their interests. They may even expressly agree not to bid against each other, in furtherance of a plan mutually agreed upon as calculated to conserve their rights. But in so doing, their activities must not operate to exclude any part of the general public as purchasers at the sale." (Emphasis added.)
In the case at bar, the testimony was that Dr. Berrong's sole purpose in entering into the agreement proposed by Saunders was to protect a legitimate interest which he had in the property to be sold. Whether the agreement was entered into with honest motives was a question of fact for the jury to determine from the testimony adduced at the trial, and the jury so determined this question in favor of Dr. Berrong. As long as Dr. Berrong agreed in good faith, he is entitled to the benefit of his contract, no matter what may have been the secret purpose or intention of A.L. Saunders, Jr.
There was nothing in the agreement between Dr. Berrong and Saunders and Miller that he, Dr. Berrong, would attempt to keep the general public from bidding, and the unchallenged testimony was that Dr. Berrong did nothing to keep the general public from attending the sale and bidding, and that in fact a large number of people did attend the sale, and that several bids were made, both for the several classes of property when offered separately, and when it was offered as a whole.
It would be unfair, unjust, and inequitable to say to a person who happens to be a stockholder or director, that under no circumstances can you agree or contract to protect your interest because such a contract would be against public policy; and neither can you bid at a judicial or public sale for the assets of the corporation because if you do you will be regarded with suspicion and with a jaundiced eye.
Fortunately a majority of the courts have adopted a more enlightened view and have made, as an exception to the general rule, the person who has an interest to protect.
The jury has determined that Dr. Berrong had a legitimate interest to protect and that he protected this interest with an agreement honestly made and honestly executed by him. There is substantial evidence in the record to support the jury's finding.
The judgment of the lower court is, therefore, affirmed.
Affirmed.
RODGERS, PATTERSON, INZER and SMITH, JJ., concur.
ETHRIDGE, C.J., and GILLESPIE, JONES and BRADY, JJ., dissent.
This case involves a contract of two of the three directors of a small corporation and an employee, by which one director and the employee agreed to pay the other director for refraining from bidding against them at a federal tax sale. The question is whether this contract is enforceable. With deference to my colleagues joining in the controlling opinion, I think it is not. First, this is a contract which plainly says on its face that it was for the purpose of getting Berrong, a director and apparently a dominant party, "to refrain from bidding against them for * * * assets" of the corporation. Berrong had no lien. Second, this director (appellee) had fiduciary duties to the corporation, its stockholders and creditors. Both of these undisputed factors and the great weight of authority, in my opinion, require a holding that the contract is against public policy and unenforceable. Moreover, the controlling opinion gives corporate directors a wider latitude in negotiating and contracting among themselves for insolvent corporate assets than any of the courts have thus far allowed.
The general rule is that any act or agreement which tends to stifle or chill the bidding at a judicial sale vitiates it and constitutes ground for setting it aside. Further, a contract made for that purpose is unenforceable as against public policy. 50 C.J.S. Judicial Sales § 22 d, pages 608-610 (1947); 30A Am.Jur. Judicial Sales §§ 98-100 (1958); Annot., 14 A.L.R.2d 1267 (1950). The reason for this rule is that a judicial sale should be conducted so as to secure the best price that can be had for the property. To that end, full, free and fair competition should be secured.
There is a limited exception to this general rule that agreements to stifle or chill bidding at public sales are void as against public policy. It is that such a contract is enforceable between the parties (a) where the combination was for the purpose of protecting liens held by them, as in the Grandberry case, or (b) where by reason of the magnitude of the sale, the parties individually would have been unable to participate in the bidding, and therefore agreed to purchase the property for their joint benefit. Grandberry v. Mortgage Bond Trust Co., 159 Miss. 460, 132 So. 334 (1931); 30A Am. Jur. Judicial Sale §§ 99, 100 (1958). Neither exception exists here. Grandberry involved an agreement between several mortgagees of an individual's property. It stated only that holders of these liens could agree in good faith about the bidding and division of proceeds. Berrong had no lien on the corporate property, and he was in a fiduciary relation to this insolvent business.
Fulgham v. Burnett, 151 Miss. 111, 129, 117 So. 514, 516 (1928), held that prospective bidders at a public sale cannot agree to refrain from bidding one against the other, and to do so renders the sale as to any confederate void. Moreover, Everett v. Hubbard, 199 Miss. 857, 25 So.2d 768 (1946), declined to extend Grandberry, "involving an agreement between lien holders interested in property to be sold under a deed of trust," and held that it was not "an authority in regard to an agreement between a lienholder and the unsecured creditors of a wholly insolvent estate (by which one refrained from bidding at a commissioner's sale), insofar as constituting a sufficient consideration to compel specific performance is concerned." 199 Miss. at 865, 25 So.2d at 771. Everett limited the Grandberry rule to agreements between lienholders. These two cases must be considered in determining the limitations of the Grandberry case.
The question here is not, as the controlling opinion suggests, whether the agreement between Berrong and others is void because it actually stifled or chilled bids at the public sale; or whether Berrong entered into the contract with "honest motives." The first would be almost impossible to prove in most instances. The second is irrelevant if the agreement was made to exclude a prospective bidder. This contract expressly states that it was for the purpose of getting Berrong to refrain from bidding, in short, to get him out of the list of possible or probable purchasers at the tax sale. That was the undisputed purpose, and Berrong agreed to take $3,000 for that right. Such a contract is unenforceable, since all of the parties to it are in pari delicto. Certainly appellee has not brought himself within the exception of the Grandberry case. An extension of that limited exception to a corporate director without a lien is without precedent. It would expand the power of directors to manipulate among themselves for the property of an insolvent corporation.
The following general rules illustrate the reasons of public policy for refusing to enforce a contract of the present type. A director or officer of a corporation has no right to purchase the corporate property at a judicial or other public sale, and if he does so, the sale is voidable. However, this is subject to the qualification that, if the officer has a lien, or if there are other circumstances making it equitable to uphold the purchase, including good faith, fair dealing, and an adequate consideration, the purchase may be valid. 19 Am.Jur.2d Corporations §§ 1315, 1316 (1965). Directors and officers, although not trustees in a technical sense, occupy a fiduciary relation to the corporation and to its stockholders. Knox Glass Bottle Co. v. Underwood, 228 Miss. 699, 89 So.2d 799, 91 So.2d 843 (1956). Further, the restricted rule permitting directors to purchase at a judicial sale of a solvent corporation is "even more limited" if the company is insolvent at the time of the forced sale. 3 Fletcher, Cyclopedia Corporation § 877 (1965). By the great weight of authority, the assets of an insolvent corporation are a trust fund for the benefit of the company's creditors. 15A Fletcher, Cyclopedia Corporation §§ 7369, 7385 (1938); Payne v. Bullard, 23 Miss. 88 (1851).
Millsaps v. Chapman, 76 Miss. 942, 26 So. 369 (1899), applied these principles to a director, who purchased land belonging to an insolvent bank for considerably less than its value. It was held that directors are fiduciaries, and are forbidden to deal in property of the bank for their own personal advantage. At the option of the bank or its creditors, the sale may be set aside, or the fiduciary may be required to account for his profits. Cf. Harris v. Bailey Avenue Park, Inc., 202 Miss. 776, 32 So.2d 689 (1947) (director purchasing at foreclosure of his own mortgage upheld.) Frierson Building Supply Company v. Pritchard, 176 So.2d 301 (Miss. 1965), is not applicable here. It did not deal with a contract expressly made for the purpose of removing a corporate director as a prospective bidder. Further, it recognized his fiduciary status.
In the instant case, the contract upon which Berrong seeks to recover the amount of his investment in this insolvent corporation was made by him as a director with another director and an employee for the purpose of removing him from the list of prospective bidders at the sale. Assuredly, it was a contract to stifle or chill the bids at the sale, by taking out a person who may have been the most interested bidder with resources. Obviously Miller, the other director, and Saunders thought he was, because they undertook to agree to pay him $3,000 to get him out of the way. The issue is not whether Berrong had "honest motives," as the controlling opinion says. This contract on its face was executed to exclude competition. It stated it was for that purpose, and the testimony shows that Berrong and Miller admitted it. Twenty-five to thirty people were present at the sale, and about three bid on the property. Yet it sold for $4950, less than the tax lien of $5,000.
It is said, finally, that Berrong had an "interest" to protect, and thus could make this contract validly. The corporation was insolvent, and Berrong's original $3,000 investment, representing his share of the capital stock, was lost irretrievably and could not be recovered legitimately under any circumstances. Thus Berrong entered into a plan with the other director and Saunders to convert a worthless investment into $3,000, under circumstances that necessarily worked to the disadvantage of the creditors. Accordingly, Berrong had no legitimate interest to protect.
When the admitted reason for this contract is considered in the light of the facts that two of the three directors of the corporation joined in it, and they were fiduciaries for creditors of this insolvent company, the reasons of public policy for refusing to enforce such an agreement appear to me to be manifest. All parties to the instrument were in pari delicto, so the Court should refuse to assist any of them in its enforcement. For these reasons I would reverse, and render judgment here for appellant.
GILLESPIE, JONES and BRADY, JJ., join in this dissent.