MINING REPORTS.

VOL. IV.

HARTS ET AL. V. BROWN ET AL.

(77 Illinois, 226. Supreme Court, 1875.)

1 Director may deal with corporation same as stranger-Deed of Trust. A director or stockholder of a private corporation may trade with, borrow from, or loan money to the company of which he is a member, on the same terms and in like manner as other persons; but where a director loans money to his corporation, taking a deed of trust to secure the same, he must act fairly, and be free from all fraud and oppression; and if in so doing he acts for the interest of the company, and imposes no unfair or unreasonable terms, the security may be enforced the same as if given in favor of any other person. Relation of director to company when purchasing its bonds or property. The managers or directors of a private corporation are not trustees of its property in such a sense as to disable them from purchasing the property and stock belonging to it, with the same effect as though they were not managers or directors. They have the right to purchase the bonds or other indebtedness of the company. Idem-Purchase at foreclosure not in good faith, if company able to redeem. Where a corporation has money, or assets convertible into money, the purchase of its bonds or lien indebtedness by directors as a means of enforcing sale of its property would be in bad faith, and the title thus acquired would not be sustained in equity.

Purchase at foreclosure where company refuses or is unable to redeem. But where the company is insolvent or unwilling to pay or redeem after opportunity offered to all the stockholders to make advances and save the property, a sale under the security in such case is valid. Duty of directors to dispose of remaining assets after loss of its substantial property. Where the essential and principal property of a mining company is sold under a trust deed securing its bonds, the company owing still other debts, it becomes the duty of the directors to dispose of the remaining property, and it may be so disposed of under the trust deed after sufficient has been realized under its foreclosure to pay the bonds secured.

Fiduciary purchasing at his own sale, after bidding off parcels suffi-. cient to pay debt. When after sufficient parcels had been sold under a

'Twin Lick Co. v. Marbury, 3 M. R. 688.

2

CORPORATION (CONTINUED).

trust deed to pay the debt secured the remaining parcels were knocked off at the same sale and bid in by the creditor, a director in the company: Held, that the sale of such parcels in excess was void because as to such property the directors were the vendors and they could not purchase at a sale made by their own authority.

Subrogation in such case. In such case where the receipts in excess of the debt secured, were used to pay off bona fide debts of the company, the parties paying such debts were entitled to be subrogated to the rights of the creditors paid, and such amounts allowed to them; but upon an accounting they should be charged with the full value of such parcels instead of the amount of the bids.

Appeal from the Circuit Court of Logan County.

Bill in chancery filed by Jefferson Brown and numerous others against David H. Harts, the Lincoln Coal Co. and others. The object of the bill and the material facts are stated in the opinion.

E. D. BLINN and ROWELL & HAMILTON, for appellants.

HOBLITT & FOLEY and NELSON & ROBY, for appellees.

By the Court, WALKER, C. J.

The Lincoln Coal Company was first organized in the year 1867, under the general incorporation law of this State, but afterward became incorporated under a special charter adopted at the session of the General Assembly of 1869. The stock was divided into five hundred shares of $100 each. Three hundred were sold and paid for in full, but the remaining two hundred were apportioned among the stockholders according to the number of shares each held, upon their paying $30 on each share. Three shares were subsequently for feited, leaving four hundred and ninety-seven shares to represent the capital stock of the company.

The organization proceeded to sink a shaft, and to prepare for mining coal. The money received on the sale of shares of stock was expended, and debts to the amount of from $23,000 to $33,000 were contracted by the company. Bonds of the corporation were issued and sold to Musick, to the amount of $9,400, and a trust deed was executed to him on

the property of the company to secure the payment of the

same.

These bonds matured about the first of August, 1871, and the greater portion of them were held by Musick and Hall, who demanded payment, and refused to extend the time unless personal security was given. Prior to that time, the property had been sold under a decree for a mechanic's lien for $2,000, and there was other indebtedness, as it is claimed, over the amount of assets to meet the same.

Thereupon the directors called a stockholders' meeting and the secretary gave each shareholder a notice thereof and of the object of the meeting. It was held on the first of September, when a portion of the stockholders attended, and the condition of the affairs of the company was laid before them, and a proposition was submitted that each shareholder contribute his proportion of the amount necessary to relieve the company from this indebtedness, and they were requested to severally pay such sums. The property was advertised and sold on the 23d of December, 1871, and Frorer became the purchaser, for the amount of the indebtedness of the company for the use of all stockholders who should join in forming a new company, and contributing thereto in proportion to the stock held by them in the old company.

Before this sale was made, Musick and appellants entered into a written agreement that he should sell and transfer to them forty-three and one third shares of stock, and assign to them fifty-two bonds of the company, of $100 each with the interest thereon, and a promissory note executed by Frorer, Howser and Ezra Boren to Musick, for $3,000 with ten per cent. interest; and that he would sell the property of the company, under and in conformity to the terms of the trust deed as soon as possible after the first of August, 1871, and to execute proper deeds therefor.

Appellants, on their part, agreed to execute to Musick four promissory notes-one for $2,400 and three for $2,500 eachand to execute a mortgage on their interest in the coal company's property, to secure the payment of the money. They were to keep Musick harmless on account of an agreement in reference to the note he assigned to them, and free from liability to the coal company.

After the property was sold and purchased by Frorer, appellants organized a new company, under the name of the Lincoln Coal Mining Company. They put in the property thus purchased at $80,000 and divided the stock among themselves, and have been operating it with good profits and dividends ever since.

Appellees filed a bill against appellants and Musick, claiming that the sale was fraudulent and void; that the company had no power to make the trust deed to any one, and especially to a director of the company, and that appellants wrongfully combined to compel a sale of the property, and to become the purchasers, and thus defraud the other stockholders out of their interest in the property.

Musick filed a cross-bill, alleging that he was induced to sell his stock to appellants by false and fraudulent representations. Appellants claim that the company was hopelessly insolvent and without means to pay their debts and without credit, and that the property had been sold under a decree of court, and that the time for redemption would soon expire, and that, for the purpose of saving the means they had already embarked in the enterprise, they determined to become the purchasers, not at the sum due Musick, but at a price which would pay all the creditors of the company, and then organize a new company, giving to all the stockholders the opportunity to participate in the new organization by contributing their ratable proportion of the sum necessary to pay the purchase price they had paid for the property.

On a hearing, the court below dismissed Musick's cross-bill, but granted the relief sought by complainants in the original bill. The court decreed a rescission of the sale and stated the principles upon which an account should be stated, and referred it to the master to state the account. From that decree defendants prosecute this appeal, and assign various errors.

Had the directors legal authority to borrow money and to execute a trust deed for its security on the property, or a mortgage with a power of sale? Their charter authorizes them to contract and be contracted with; to sue and to be sued. And the eleventh section of their charter expressly confers the power to borrow money, and to issue notes or bonds for the same, secured by mortgage. See Private Laws, 1869, vol. 2, p. 837. This, then, places the power beyond all question.