Union Ice Co. of Philadelphia v. Hulton , 291 Pa. 416 ( 1927 )

Argued November 29, 1927. Defendant appeals from the decree of the chancellor directing him to account. He was the president of plaintiff company and made loans to it of $33,000. The loans not being paid, he brought suit against the company and obtained judgment for the amount due to him and issued execution and sold the property at sheriff's sale, purchasing it for a nominal sum, subject to a mortgage. He did not give the directors of the company any notice of the issuing of the execution or of the time and place of the sheriff's sale and they did not know of either, although he had notified them of his intention to reduce his claim to judgment. Alleging that the fair market value of the property was much in excess of the amount at which he purchased it at the sale, this proceeding was begun to compel defendant to account and the court by its decree requires him to do so.

Appellant takes the position that the chancellor erred in finding that he did not give the directors or stockholders notice of his intention to issue execution and to become the purchaser at the sheriff's sale. The basis of this contention is that the attorney, who represented him and who was also vice-president of the company, told the directors that appellant would have to reduce his notes to judgment and that eventually he would have to sell the property. This was not such notice as the directors were entitled to receive. It was vague and indefinite, only indicating a possible future intention. They were entitled to know when the execution issued and the time and place of sale in order that they might take steps to protect the interests of the stockholders for whom they and defendant were trustees: Gilmore v. Gilmore Drug Co.,279 Pa. 193.

Appellant further contends that he was not required to give notice of the execution and sale, that when he began legal proceedings to reduce his claim to judgment that was notice of all the consequences that might result from such proceedings, including notice that the property of the company would be sold after judgment if it was not paid. While it is true that in enforcing his claim against a corporation a director or officer may employ the same methods as are open to other creditors (Corpus Juris, Vol. 14A, sec. 1905) yet in so doing he must take no unfair advantage of it. He must be scrupulous to see that some one on the corporation's behalf knows what is being done so that its interest may be safeguarded (Hechelman v. Geyer, 248 Pa. 430; Thompson on Corporations, section 1254, p. 245; Marr v. Marr, 73 N.J. Equity 643); the last citation being a case, closely analogous to the one at bar, where also the president of a corporation bought its property at a sale on his own judgment and in which he gave no notice of the sale and it was held that the complaining stockholder could either treat the defendant as his trustee to the extent that the defendant profited by the sale or set it aside. Law v. Fuller, 217 Pa. 439, cited by appellant in support of his contention that notice by him of the execution and sale was not required, points out that, where an officer or director who is a creditor of the corporation enforces his claim against it and buys its property in at the sale, he is "subject to severe scrutiny and under the obligation of acting in the utmost good faith," and that, while he may buy at the sale, the sale must be a fair one. In the pending case the proofs indicate that the price paid by appellant was not the fair value of the property.

Complaint is made that there is no specific finding by the chancellor of the fair market value of the property at the time of the sale and therefore no determination of its value or that the appellant profited by the sale. At this stage of the proceeding the chancellor was not required to go into a thorough inquiry as to the value of the property. He need only be prima facie satisfied that the value was greater than appellant paid. What the actual value was will be determined on the accounting. If it there appears that defendant profited nothing the proceeding will fail. To the testimony offered by plaintiff to show an excess market value over the sale price no exception was taken. When his good faith in making the purchase was challenged the appellant had the burden of showing that the price was adequate: Corpus Juris, vol. 14A, sec. 1881, p. 144; Thompson on Corporations, vol. 2, sec. 1252, p. 240; Fletcher on Corporations, vol. 4, p. 3535.

We are satisfied, in view of the fact that no notice was given of the execution or sale and in the light of the prima facie proof that by his purchase appellant will profit at his company's expense, that the court properly decreed an accounting which will proceed in accordance with the equity rules.

The decree is affirmed at appellant's cost.