Cumberland Coal & Iron Co. v. Parish

Alvey, J., delivered the opinion of the Court.. It appears that at the time when the mortgage sought to be enforced was made, and for sometime previous, Sherman, the mortgagee, was not only one of the directors, but was a member of the executive committee; and also financial agent of the Oompanjr, the mortgagor. There is therefore no question as to the fact that Sherman bore an important fiduciary relation to the Company, as well as ⁶⁰⁵ one of trust and confidence in the general control and management of its affairs. Holding such relation, he was bound to exercise all the power and authority delegated to him, in conjunction with others, for the protection of the property, and the promotion of the best interest of the corporators, the stockholders, according to his skill and ability.

As between trustee and cestui que trust, or agent and principal, the rule is inflexible, that the trustee or agent cannot be allowed to take the benefit of a transaction the entering into which was in violation of his duty, or where the benefit claimed and the duty required to be performed are in any respect inconsistent, the one with the other. The rule is founded on considerations of public policy, having in view the great difficulty, which must always exist in such cases, of obtaining clear and satisfactory evidence of the fairness of the transaction, and of the entire absence of all abuse or advantage taken of the confidence reposed in such trustee or agent. And it is now well settled that directors and managers of corporations, and other companies, are equally within the rule which guards and restrains the dealings and transactions between trustee and cestui que trust, and agent and his principal; such directors or managers being in fact trustees and agents of the bodies represented by them. Attorney General vs. Wilson, 1 Cr. & Phill., 1; Benson vs. Heathorn, 1 Y. & Coll.

C. C., 326; York & North Midland R. Co. vs. Hudson, 16 Beav., 485; Aberdeen R. Co. vs. Blaikie, 1 Macq., 461; Great Luxembourg R. Co. vs. Magnay, 25 Beav., 587; Hoffman Steam Coal Co. vs. Cumbld. Coal & Iron Co., 16 Md., 456 , and same case in 20 Md., 117 . The affairs of corporations are generally intrusted to the exclusive management and control of the board of directors ; and there is an inherent obligation, implied in the acceptance of such trust, not only that they will use their best efforts to promote the interest of the shareholders, but that they will in no manner use their positions to advance ⁶⁰⁶ their own individual interest as distinguished from that of the corporation, or acquire interests that may conflict with the fair and proper discharge of their duty. The corporation is entitled to the supervision of all the directors, in respect to all the transactions in which it may he concerned; and if one of the directors is allowed to place himself in the position of having his.conduct and accounts made the subject of supervision and scrutiny, he, of course, cannot act, in regard to those matters, both for himself and the corporation; and the consequence is, that the corporation is deprived of the benefit of his judgment and supervision in regard to matters in which such judgment and supervision might be most essential to its interest and protection.

Not only this, the remaining directors are placed in the embarrassing and invidious position of having to pass upon, scrutinize and check the transactions and accounts of one of their own body, with whom they are associated on terms of equality in the general management of all the affairs of the corporation. The design of the rule, therefore, is to secure a faithful discharge of duty, and, at the same time, to close the door, as far as possible, against all temptation to do wrong, by subjecting the transactions between parties standing in such confidential relations, to the most exact and rigid scrutiny, whenever such transactions are brought in question before the Courts. The transaction may not be ip so facto void, but it is not necessary to establish that there has been actual fraud or imposition practiced by the party holding the confidential or fiduciary relation; — the onus of proof being upon him to establish the perfect fairness, adequacy, and equity of the transaction ; and that too by proof entirely independent of the instrument under which he may claim. This is required, upon the general principle, “that he who bargains in a matter of advantage with a person, placing confidence in him, is bound to show that a reasonable use has been made of that confidence; a rule applying equally ⁶⁰⁷ to all persons standing in confidential relations with each, other.

If no such proof is established, Courts of Equity-treat the case as one of constructive fraud.” 1 Sto. Eq. Juris., sec. 311, and also secs. 321, 322; Pairo vs. Vickery, 37 Md , 467. Applying these general principles, and considering the case irrespective of the assignment of the mortgage to the appellee, the proof in the record falls far short of being sufficient to overcome the presumption against the validity of the mortgage, and of establishing affirmatively the perfect fairness, adequacy, and equity of the transactions upon which the mortgage professes to be based.

On the part of the appellee there were three witnesses examined ; the appellee herself, Sherman, the mortgagee, and Loomis, the secretary and treasurer of the Cumberland Coal and Iron Company at the time the mortgage was made. The appellee does not profess to have any knowledge whatever of the original transactions between Sherman and the Company, and upon which the mortgage was based, nor of the circumstances under which the mortgage was executed. Her testimony is confined exclusively to the circumstances of the assignment of the mortgage on the 6th of October, 1863. Sherman’s testimony, while it relates to the consideration of the mortgage, and the circumstances under which it was executed, is of the most indefinite and inconclusive character.

Many of the essentials to maintain the transaction he fails to prove; and of those in regard to which he does speak, he is by no means positive and certain. The mortgage bears date the 23rd of September, 1857, and was acknowledged throe days thereafter. It was signed by Mehaffey as president, and Loomis as secretary. The affidavit as to the bona fides of the consideration was not appended until the 3rd of May, 1861, and the mortgage was not filed for record until the 4th of June, 1861, — nearly four years after its execution.

The ⁶⁰⁸ mortgage recites, that the mortgagee had theretofore, at the instance of the mortgagor, at several times, advanced different sums of money, and on account of xdhich advances the sum of $15,000 then remained due to the mortgagee-; and it further recites, that it was contemplated that the mortgagee should become bound for the mortgagor, by the loan of his credit, for the use and accommodation of the Company, to the extent of $40,000 ; and that the advances were made, and the then existing liabilities incurred, on the express antecedent promise and agreement, that the Company would secure and indemnify the mortgagee by the execution of a mortgage, whenever the latter should require such security, Four days after the acknowledgment of this mortgage, that is to say, on the 80th of September, 1857, the Company made to Sherman, the mortgagee, and to Mehaffey and Bloodgood, a deed of trust of all its property, except a particular portion thereof which had been previously conveyed in trust, but including that embraced in the mortgage, to secure the payment of its creditors, among whom was Sherman, to the amount of $16,585.75. This sum is shewn by the books of the Company to be the amount due Sherman at the date of the deed of trust, and it is the only sum or credit shewn by the books to be then due, and owing to him on any account; and it is conceded that if that was the only sum due Sherman at the time, there is no mortgage debt due ; for the deed of trust superseded and took the place of the mortgage, as to Sherman's claim, and besides, all the debts intended to be secured by ■the deed of trust, have been settled and adjusted, including that shewn by the books to have been then due Sherman. But it is contended by Sherman and his assignee, that the debt of $15,000, mentioned in the mortgage as due on account of advances previously made, was a separate and distinct indebtedness from that shewn by the hooks, and that the advances to the Company, making up the aggre ⁶⁰⁹ gate of the mortgage debt, was never entered in the books of the Company, and hence the mortgage debt was not included in that secured by the deed of trust. This, to say the least of it, is a little strange.

Why take the mortgage for part and not the entire indebtedness ? The amount on the books was in no manner secured, and there could have been no good reason for separating the indebtedness, and securing part and not the whole. The books of the Company show that there were regular accounts kept with Sherman, and that he was credited with advances made from time to time. Why the advances constituting the mortgage debt were not entered in the account, certainly requires full explanation.

Sherman was a director, a member of the executive committee, and financial agent of the Company, and as such not only had access to the books, but it was his duty to inspect them, and to see that they were properly kept, and especially was it his duty to see that all proper entries were made in regard to transactions of his own with the Company. lie says, in his testimony, that at the time the mortgage was made the Company owed him the $15,000 for cash advanced; but whether advanced in one sum or not he cannot tell; and that he knows of no books, accounts, or documents, that would give information upon the subject. He cannot tell