Tenison v. Patton (95 Tex. 284, 1902)

WILLIAMS, Associate Justice.

This action was brought by defendants in error in behalf of the stockholders of the State National Bank of Dallas, by two of their number, against the bank, Tenison, and. others of its officers, one of its objects being to require Tenison to account for profits derived by him from the sale of a tract of land belonging to the bank while he was acting as its director, trustee and agent. The land had been conveyed to Armstrong, president of the bank, in payment of a debt due to it, and while he so held the legal title in trust, the title became involved in litigation with third parties. Before this, however, the State Bank had gone into liquidation and had arranged for a conveyance of most of its assets to the City National Bank, retaining only such as were not available in this way, among which was the land. Tenison, who was a director and had been the cashier of the State Bank, had the chief management of the assets remaining in its hands and had charge of the suit about the land. A compromise of the suit was agreed upon, to effect which it became necessary for the bank to pay to adverse parties the sum of $7500, and, as it had no funds on hand, Tenison advanced this sum, and thereafter Armstrong -conveyed to him the legal title in trust for the bank and as a security for the money advanced, The land was thus held for sale and a distribution, of its proceeds among the stockholders, after paying the amount advanced by Tenison. Tenison received from J. F. O’Connor a proposal to pay $11,000 for it if he, Tenison, would look after and sell it, O’Connor agreeing, at the same time, to allow Tenison one-half of the net profit derived from such sale after paying the expenses and returning to O’Connor the purchase money with 6 per cent interest. A meeting of the board of directors was called at which more than a quorum were present and acted, without Tenison, and the offer of O’Connor was submitted and accepted, Tenison not voting.

The evidence tended to show that Tenison had previously made in.qMries as to the value of the land and efforts to secure a satisfactory offer for it, in the county where it was situated, and had failed. He had visited the land twice, in company with a surveyor and real estate agent who was acquainted with the. value of lands in that section and who had ’ examined and made a map of the tract in question. The highest valuation put upon it by this person was $11,000. In this, however, he allowed a margin of at least 25 per cent for a profit to the purchaser, to be realized by subdividing, improving, and selling on time; and the conclusion is justified that in buying, Tenison and O’Connor contemplated the making of some such profit by thus managing the land after it should be purchased, Tenison testifying that in this way he expected to realize $2000. The other directors had little knowledge of the land and its value, except such as they derived from Tenison, but the jury could have concluded from the evidence that Tenison made a full and fair disclosure to them, at the meeting, of all facts within his knowledge affecting the sale, as well as of the interest which he was to have with O’Con-nor, and that he took no advantage of his position in securing the trade, and that the directors acted freely and fairly upon the facts laid before them, uninfluenced by him. At the meeting, the probability of realizing more money from the land by improving and selling in subdivisions and on time, as indicated, was discussed, and the conclusion was reached that the bank had no funds for such a purpose and that it was best to sell for cash at the price offered; and the jury could have found that the price offered by O’Connor was the highest that was obtainable and the fair value of the land in its then condition.

The resolution adopted by the directors authorized Tenison to convey the land to O’Connor for the price named and pay himself for his advances and expenses previously incurred, ratifying the conveyance which had been made to him by Armstrong; and Tenison accordingly made, the deed to O’Connor, received and applied the price according to the resolution, and thereafter acted with reference to the land under his agreement with O’Connor and a power of attorney from the latter. The remainder of the price, after deducting Tenison’s claim, was distributed among stockholders. At the time of the sale, all parties supposed the tract to contain 640 acres, but afterwards, Tenison, acting for O’Connor and himself in having it surveyed, discovered that there were 690 acres. He made some improvements on it, and, after some effort, sold 600 acres within a year from the time of O’Connor’s purchase for $14,000, of which $7350 was paid practically in cash and the remainder on six and eighteen months time. Within a short time he also sold 90 acres on time at $2493.35, but the purchaser never paid for it, and it was taken back with probably some improvement and was on hand at the time of the trial.

The only question submitted by the trial court to the jury was as to the value of the 90 acres at the time of the trial; and for half of this value as found and half of the profit on the sale of the other part of the land, less some expense, the court held, upon the undisputed facts, Tenison was liable, and rendered judgment against him. This was affirmed by the Court of Civil Appeals.

The defendant, in writing, requested the submission of various other issues, the requests being sufficient to raise the questions discussed.

The argument in support of the judgment rests upon the principle that a trustee or person occupying a fiduciary relation to another is incapacitated in equity to buy from himself property committed to his care, or secure to himself an advantage in a purchase of such property by another from him. This principle has long been established, and, in its proper spirit, is to be fully recognized and enforced. The chief difficulty in the present case is to determine its scope and the extent of its application to the transaction in question.

While it is true that one filling such a position can not sell to and buy from himself, or be personally interested in a sale by himself to another, it is equally true that he may, under proper circumstances, buy, or be interested in buying, directly from his beneficiary. The reason given by courts of equity for the rule that a trustee may not sell to himself the property of the cestui que trust is that the latter is entitled to the disinterested management and judgment of the trustee in effecting a sale, and that his self-interest must not be allowed to intervene to conflict with and probably prejudice that of his constituent. Another reason given is that such a dealing would lack the element essential to a contract of two competent parties, the trustee being disqualified by his personal interest from representing his beneficiary.

This principle has been applied by the courts of England to a'great variety of transactions, and it has been very generally held that sales and purchases and other contracts in which trustees or agents represented their constituents, and, at the same time, themselves or other parties, were voidable at the mere option of the beneficiary, whether the transaction was found to be otherwise fair and honest or not. It is also fully recognized and enforced by the courts of this country, but has not always been carried to quite the same extent as in England. Thus, in this and some other States it has been held not to prohibit purchases by mortgagees at their own public sales made under powers given in the mortgages. The Howards v. Davis, 6 Texas, 174; Allen v. Gillette, 127 U. S., 596. The exceptions represented in this class of decisions have little to do with the present case. They serve, however, to show that the rule is often stated too broadly, both by elementary writers and in the dicta of courts.

Proceeding upon this principle, eases involving transactions between one of several trustees, with his cotrustees, have been brought within its operation and subjected to' the same results as those which attach to a transaction in which one trustee represents the beneficiary, having, at the same time, an adverse interest of his own; and this without regard to the question whether or not the cotrustees had the power to act without the concurrence of their interested associates.

Difficulties have arisen in applying the doctrine to transactions between a corporation, acting by its board of directors or governing trustees, and particular directors or trustees. It is firmly established that such directors and trustees occupy towards the company and its shareholders a fiduciary relation which brings them within the operation of equitable principles, and it has been frequently laid down in the broadest terms that, such is the duty of each of them to give to the company his disinterested efforts in promoting its interests, that a purchase from or sale to it by one of them may be avoided at its option, whether the transaction be fair or not, and although the corporation were represented by other directors who would be competent to act for it in the same kind of a transaction with one not connected with the company. It is said that each director is under obligation in such transactions to give to his associates the benefit of his unbiased aid and counsel, and that he can not divest himself of this duty nor be released from it by his cotrustees. For this reason, many of the authorities treat such transactions as being controlled by the principle that a trustee can not purchase from, sell to, or deal with himself in the management of trust property, rather than that which governs transactions occurring directly between the trustee and cestui que trust. Carried to its logical results, this view would seem to avoid, at the mere option of the corporation or any one of its stockholders, any contract which a director might make with the company, for the reason given is that the danger of abuse and of concealment of fraud or' unfairness is so great that a court of equity will not inquire into the fairness of the transaction but will allow the beneficiary the option of avoiding it whether fair or not. Aberdeen, etc. Railway Co. v. Blaikie, 2 Eq., 1286; Imperial Mercantile Assn. v. Coleman, 40 L. J. Ch., 262; A. C. L. R. 6 Ch., 565; Cumberland Coal Co. v. Sherman, 30 Barb., 563. Actual adjudications have not always carried the doctrine to this extent, and in this country, at least, many of the decisions are wholly inconsistent with such an extension of it.

The right of directors to make fair contracts generally with the corporation is comprehensively stated by many authorities, and such contracts have been upheld in numerous cases, some of them involving purchases of corporate property. Manufacturing Co. v. Bradley, 105 U. S., 182; Rolling Stock Co. v. Railroad, 34 Ohio St., 450; Twin-Lick Oil Co. v. Marbury, 91 U. S., 587; Harts v. Brown, 77 Ill., 226; Choteau v. Allen, 70 Mo., 338; Kitchen v. Railway, 69 Mo., 244; Cavendish-Bentinck v. Fenn, 12 App. C., 652; Ashhurst’s Appeal, 60 Pa. St., 290. The authorities examined are so numerous that only a few are cited.

It is doubtless right to allow a beneficiary the option of avoiding a trade affecting his interests which has been effected by a trustee representing both parties to it, for the reason that the trustee ought not to be allowed to act for and bind two parties having conflicting interests. It may be perfectly just to apply this principle to transactions in negotiating which a director or directors of a corporation were personally interested, and, at the same time, represented the corporation, either alone or conjointly with codirectors; and this is probably the true spirit of the rule as it has been enforced in most of the cases. But we think it is not true that one who holds the position of director is incapable, under all circumstances, of divesting himself of his representative character in a particular transaction and dealing with the corporation through others competent to represent it, as other trustees may deal directly with the beneficiaries. This proposition seems to be recognized in the opinion in the case of Cavendish-Bentinck v. Penn, supra, as well as in many of the American courts.

Thecorporation is a separate entity for which its board of directors acts.