Davis v. Rock Creek L. F. & M. Co.

California Supreme Court Jul 1, 1880 No. No. 6,481Published

Before: Ross

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Holding. The court held that a corporate president and trustee cannot bind the corporation to a mortgage and notes executed to a firm in which he is a partner, as such self-dealing violates fiduciary duties and exceeds the scope of the board's authorization.

Issues

Did the trial court abuse its discretion in setting aside the default?
Did the corporate president have authority to execute notes and a mortgage to his own firm?
Does the law permit a trustee to enter into a transaction where his individual interests conflict with his fiduciary duties to the corporation?

Disposition. affirmed

Quotations verified verbatim against the opinion

“The law, for wise reasons, will not permit one who acts in a fiduciary capacity thus to deal with himself in his individual capacity.”

“One cannot faithfully serve two masters whose interests are diverse.”

“This was clearly unauthorized by the resolution adopted by the Board of Trustees.”

Synopsis

Default — Discretion of Court.—Held, upon the facts of the case, that there was no abuse of discretion, on the part of the Court below, in setting aside a default.

Contract of Corporation — Power — Trustee ■—Evidence—Fiduciary — Constructive Fraud.—By a unanimous vote of the trustees of the corporation defendant, it was resolved to borrow a certain sum of money, and to execute a mortgage upon the property of the corporation to secure tho payment of the same—the money to be applied to the payment of the debts of tho corporation—and to that end A. Wolf, president, and F., the secretary, were authorized to execute a mortgage in the name of the corporation. A. Wolf did not borrow any money, but he had purchased the debts of tho corporation and assigned them to A. Wolf & Co., (of which firm ho was a member) and the notes and mortgage were executed to A. Wolf & Co. to secure the said indebtedness. In an action to foreclose the mortgage brought by tho assignee of tho mortgagees, held, first, that the resolution did not authorize tho execution of the notes and mortgage for any such purpose; and secondly, and apart from this consideration, tho law would not permit one who acts in a fiduciary capacity 1hus to deal with himself in his individual capacity; and held, accordingly, that the Court below did not err in excluding the notes and mortgage from the evidence.

Id.—Ratification.— IZeld, upon the facts of the case, that there was no ratification of the notes and mortgage.

Ross, J.: The complaint alleges that on the 14th day of June, 1877, the defendant corporation, for a valuable consideration, executed to A. Wolf & Co. three several-promissory notes, each for the sum of $4,328.33, making in the aggregate the sum of $12,985, and to secure the payment of the notes executed on the same day to Wolf & Co. a mortgage upon the property of the corporation. The notes and mortgage were afterward assigned to the plaintiff, and not having been paid, this action was instituted to foreclose the mortgage. McGrath, who held a subsequent mortgage from the corporation, was made a party defendant. He answered, denying that the defendant corporation ever executed the notes and mortgage mentioned in the complaint, and setting up Bis own mortgage. The default of the defendant corporation was entered, which was afterward, on motion, based upon affidavits, set aside by the Court, and an answer permitted to be filed by the corporation. By its answer the latter also denied that it ever executed, or caused or authorized to be executed, the notes and mortgage set out in the complaint as the basis of the plaintiff’s action.

We think there was no abuse of discretion on the part of the Court in setting aside the default and permitting the answer to be filed.

The record shows that there were five trustees of the corporation, and that these trustees held all of its capital stock. The A. Wolf of the firm of A. Wolf & Co., to whom the notes and mortgage were given, was one of the trustees and the president of the corporation ; and he, as president, together with one Fairbanks, as secretary, executed them on behalf of the corporation. As the basis of their authority so to do, the plaintiff offered and read in evidence, at the trial, a resolution of the Board of Trustees, in words and figures as follows:

[363]“At a meeting of the Trustees of the Eock Creek Lumber, Flume, and Mining Company, held the 15th day of June, 1877, the following resolution was offered and unanimously adopted— the following trustees being present: A. Wolf, E. McGrath, II. A. Fairbanks, C. Wright, J. F. Dana :

“ It is unanimously resolved by the Trustees of the Eock Creek Lumber, Flume, and Mining Company, a corporation, to borrow $12,985, and to secure the payment of said sum of money, to execute a mortgage upon the property of said corporation, said sum of money to be applied to the payment of the debts of said corporation, and to this end A. Wolf, president, and II. A. Fairbanks, secretary of said Eock Creek Lumber, Flume, and Mining Company, are hereby directed and authorized to make, execute, and deliver, and on behalf of said corporation, and as its act and deed, a mortgage upon said corporation property, and to affix to said mortgage and the notes which it secures, the corporate name of said corporation.

Davis v. Rock Creek L. F. & M. Co.

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Synopsis

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II. A. Fairbanks, Secretary.

II. A. Fairbanks,

C. Wright,

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