Sisk v. Jordan Co. ( 1920 )

The claimant Sisk, while a director of the Jordan Company, had numerous and large financial dealings with it. In the running account between the Company and Sisk during this period, he was credited with cash bonuses or commissions as compensation for his indorsement of notes of the Company, for his checks given in exchange for the Company's checks, and for certain real-estate transactions. The Company also sold to Sisk its customers' notes before maturity, and credited Sisk with the difference between the sale price and the face of the notes as a commission or bonus. The committee found that "there was no evidence before it as to whether or not the amounts charged were reasonable compensation for the financial assistance extended by the claimant Sisk."

In its memorandum overruling certain grounds of demurrer to the remonstrance, the trial court held that the commissions, bonuses and discounts received by Sisk were in effect and law equivalent to loans of money on a present valuable consideration; and that the facts as found showed "that Sisk dealt at arm's length with the Company, and that his dealings were for its benefit in continuing the business, and that without his assistance the Company would have been in a very precarious condition." Upon the facts found, the court held these transactions could not be impeached except for actual fraud; and that the dealings of Sisk and the Jordan Company being open and free from blame, must be held valid. In addition, the court held that as to the stockholders and corporation, the facts found showed acquiescence in and ratification of the dealings with Sisk; and that the creditors, as represented by the receiver, had no greater right than the stockholders to set aside these transactions, unless they were proved fraudulent. Further, the court held that the receiver had the burden of proving fraud as to his counterclaim, and that this he neither had assumed nor sustained so far as appeared from the report.

A director is a fiduciary of the corporation and of its stockholders. He may not use that relation for his own profit. His contracts and dealings with his corporation are not void, but are voidable unless the transaction be open, in good faith, fair, and fully understood. Equity will scrutinize the dealing between the fiduciary and his cestui que trust with jealous care, and it will set aside the transaction with the utmost freedom upon the least appearance of unfairness. Neither good intention nor lack of fraud will avail to sustain the transaction. Our own decisions establish these rules in terms at once clear and decisive. Mallory v.Mallory Wheeler Co., 61 Conn. 131, 23 A. 708; Nichols v. McCarthy, 53 Conn. 318, 23 A. 93; Looby v. Redmond,66 Conn. 444, 34 A. 102. And our rule is the rule of many other jurisdictions. Hallam v. IndianolaHotel Co., 56 Iowa 178, 179, 9 N.W. 111; Proctor v.Farrar, 213 S.W. 469 (Mo.); Cowell v. McMillin, 100 C.C.A. 443, 457, 177 F. 25, 39.

But our decisions, and those of most of our States, go further and place upon the fiduciary, whenever the transaction with his cestui que trust is before a court, the burden of affirmatively showing that the transaction was entirely fair, made in good faith, for an adequate consideration and upon a full understanding. This burden arises, we have said, out of the trust relation. It is a rule of fairness. A fiduciary claiming a benefit from his dealing with his cestui que trust, should be made to prove that he dealt in fairness and under the conditions prescribed by law. The full knowledge of the transaction is within his possession; he can and he must assume the burden of its proof. This rule we applied in a transaction between a trustee and a cestui que trust. Nichols v. McCarthy, 53 Conn. 299,319, 23 A. 93. And likewise in the case of a transfer by an heir to the administrator. State v. Culhane,78 Conn. 622, 629, 63 A. 636.

Many cases in other jurisdictions adopt this rule and apply it to the case of directors. "Whenever it appears that a director has been dealing with his corporation, the burden is at once upon him to show that his dealings have been fair and honest; in other words, that the corporation has not suffered as the result of his acts." First Nat. Bank of Hilger v. Lang,55 Mont. 146, 156, 174 P. 597, 600; Hanson Sheep Co. v. Farmers Traders State Bank, 53 Mont. 324, 335,163 P. 1151, 1154; Booth v. Land Filling Imp. Co.,68 N.J. Eq. 536, 543, 59 A. 767; Ross v. QuinnesecIron Mining Co., 142 C.C.A. 33, 39, 227 F. 337, 343; Drennen v. Southern States Fire Ins. Co., 164 C.C.A. 616, 630, 252 F. 776, 790; Pitman v.Elmore, 93 Mo. App. 592, 597, 67 S.W. 946; Woodroof v. Howes, 88 Cal. 184, 187, 26 P. 111; Sage v. Culver,147 N.Y. 241, 247, 41 N.E. 513; 10 Cyc. 808, 813.

The ruling of the trial court was directly contrary to this almost universal rule of the burden of proof. The committee found that "there was no evidence before the committee as to whether or not the amounts charged were reasonable compensation for the financial assistance extended by the claimant Sisk," and it further found that "there was no evidence before the committee to show that the prices paid by Sisk to the Jordan Company for its interest in the foregoing pieces of real estate were unfair or inequitable." These findings indicate that Sisk has not sustained the burden of proof placed upon him by reason of his relation as director to the corporation, without which proof his claim cannot be allowed.

In his dealing with the corporation, both in his loans of money and credit, and in his purchases, the individual interest of Sisk and his fiduciary interest as director met, hence the burden was upon him to show that each of the transactions was fair and equitable. If Sisk shows that his services were at the time valuable to the corporation and shows what he fairly earned, in the absence of other circumstances of inequity, his claim, to that extent, should be allowed, since he will have sustained the burden of showing the fairness of his dealing. Judge Keeler, in sustaining the demurrer to the original remonstrance, interpreted the facts as showing that Sisk dealt at arm's length with the Company. The facts found do not lead to this conclusion. The trial judge emphasizes the benefit of Sisk's dealing to the corporation, but this is not the decisive test. The benefit rendered may have been undoubted, yet the consideration claimed for the service may have been unfair, and even unconscionable. The vital fact is, that the dealing appears affirmatively to have been fair. The trial court held that these transactions could not be attacked except for actual fraud; the authorities cited show the reverse. The receiver is not in the position of the ordinary plaintiff claiming a recovery for fraud. There was no burden on him to prove the fraud.

That Sisk, while a director, made a profit through transactions with his corporation, in the absence of proof by him of the fairness of the transactions, gave the receiver the right of avoiding them unless, indeed, the contracts on their face show their fairness.

Upon the demurrer to the amended remonstrance,Judge Warner adhered to the earlier ruling of JudgeKeeler upon the bonuses and commissions arising out of the dealings other than the real-estate transactions, and overruled the demurrer as to the profit upon the Dixwell Avenue real-estate transaction, and sustained it as to the other transactions. In his memorandumJudge Warner says: "While there can be no question that the law will equally protect a director or other officer of a corporation who in good faith purchases property from it in his individual capacity, as well as an outsider, yet when the consideration apparently is inadequate, suspicion will be cast upon the transaction, and the burden rests upon such director to show the purchase was made in good faith for fair value." This accurately states the rule; but in its application to this and the other real-estate transactions, we think the learned judge failed to correctly apply it. Upon his purchase of the Dixwell Avenue land, Sisk received a commission of $450, and at the end of seven weeks he sold this at a profit of $1,450. The trial judge disallows the profit while allowing the commission. If Sisk made the profit unfairly, the receiver justly queries, why should he be paid $450 for doing it?

The committee finds that "there was no evidence before the committee as to whether or not the amounts charged were reasonable compensation for the financial assistance extended by the claimant Sisk." This finding is of no significance. The burden on Sisk compelled him to prove that the amounts he charged were reasonable and fair under the circumstances. The report of the committee does not show that these transactions were fair, nor give the facts from which this might be inferred. Until the value of the several pieces of real estate, at the time Sisk took title from the corporation, appears, no basis is at hand to determine what, if any, profit there was, and whether or not it was unreasonable or unfair. The finding of the profit to Sisk upon the values as of the time of the hearing, does not furnish the necessary basis for determining the character of these transactions.

As to the commissions, the trial court held, as an additional reason for its decision, that the corporation had ratified these transactions.

We do not so read the report of the committee. No one besides the president, treasurer and general manager of the corporation, and Sisk the director, participated in, or even knew of, these dealings. No one had the opportunity to question these transactions until the receiver took charge of the corporation. "Ratification," we said in Mallory v. Mallory Wheeler Co., 61 Conn. 131, 132 (23 A. 708), "ordinarily requires some positive assertive act. In order that acquiescence alone should become a ratification the delay must be so long continued that it can be accounted for only on the theory that there has been some affirmative act. . . . The delay must have been unreasonable; the stock holders . . . must have had an opportunity to act, and to act with perfect freedom. . . . And have been fully advised of all the material facts" in the case. The report of the committee does not reveal a ratification of this character. Moreover, the financial situation of the corporation might have been such that however binding the ratification would have been upon the stockholders, it could not affect the creditors. Not until the receiver took charge would they in fact have been represented by one having knowledge.

There is error, the judgment is set aside and the Superior Court is directed to overrule the demurrer to the remonstrance and refer the report to the committee for further finding as to each of the transactions referred to in the report, in accordance with this opinion.

In this opinion BEACH, CASE and CURTIS, Js., concurred.