tions, the mortgages made to secure the same, even to an officer of a corporation, have generally been held not invalid. Sanford Fork & Tool Co. v. Howe, B. & Co. 157 U. S. 312, 39 L. ed. 713, 15 Sup. Ct. Rep. 621. That, of course, is in the absence of fraud or an attempt to secure an undue advantage by the mortgagee.

The general doctrines applicable to transactions between directors, acting as such, and individuals, is stated by this court in Wyman v. Bowman, 62 C. C. A. 189, 205, 127 Fed. 273, as follows: "Contracts and transactions between individuals and corporations of which they are directors or officers, which are fair, which are made in good faith, which do not secure to the individuals any undue or unjust benefit or advantage, and in which the interest of the individuals and the duty of the officials work in unison for the welfare of the corporation, are valid and enforceable both at law and in equity. . . . But contracts and transactions between individuals and corporations of which they are directors or officers, which are unfair, in which the individuals have secured an undue or unjust advantage, in which an antagonism between the interest of the individuals and the duty of the officials has resulted in the triumph of the former, are voidable at the option of the corporation, its creditors or stockholders."

In Northwestern Mut. L. Ins. Co. v. Cotton Exch. Real Estate Co. (C. C.) 70 Fed. 161, Judge Philips uttered this vigorous comment: "A sound public policy, in my judgment, demands that when a business corporation has reached a point in its affairs when its directors know that it cannot pay its debts, and, for the lack of sustenance, cannot longer do business, or cannot 'act up to the design of its creation,' it is then, to all intents and purposes, insolvent. In such conjecture its directors ought not to be permitted to take advantage of their position as managing officers to appropriate its remaining assets to the payment of

their unsecured debts, to the exclusion of other unsecured creditors. Until overruled in this judgment, I shall continue to so administer the law."

In American Exch. Nat. Bank v. Ward, 55 L.R.A. 356, 49 C. C. A. 611, 616, 111 Fed. 787, discussing the question of whether a corporation may prefer its own directors if they happen to be creditors, this court held that "their own personal welfare must at all times be subservient to that of their principal;" but indicated that circumstances might fairly arise where it is impossible to borrow money from outsiders, and the directors may be the only ones who can help. The court, on page 359 of 55 L.R.A., says: "The temptations to self-aggrandizement and dishonesty are, of course, great, and require the utmost good faith on the part of directors, and subject them and all their acts to the most rigid scrutiny. Their relations to the corporations are of that intimate and fiduciary character that they are very properly held, whenever their acts are questioned, to assume the burden of proving their absolute good faith and the perfect justice of their demands."

In Twin-Lick Oil Co. v. Marbury, 91 U. S. 587, 23 L. ed. 328, 3 Mor. Min. Rep. 688, it was held that a director of a corporation was not prohibited from lending it money when needed for its benefit, and if the transaction is open and fair. In Richardson v. Green (Washburn v. Green) 133 U. S. 30, 43, 33 L. ed. 516, 521, 10 Sup. Ct. Rep. 280, 284, the court said: "Undoubtedly his relation as a director and officer, or as a stockholder, of the company, does not preclude him from entering into contracts with it, making loans to it, and taking its bonds as collateral security; but courts of equity regard such personal transactions of a party in either of these positions, not, perhaps, with distrust, but with a large measure of watchful care; and unless satisfied by the proof that the transaction was en

tered into in good faith, with a view to the benefit of the company as well as of its creditors, and not solely with a view to his own benefit, they refuse to lend their aid to its enforcement."

In Sutton Mfg. Co. v. Hutchinson, 11 C. C. A. 320, 325, 24 U. S. App. 145, 63 Fed. 501, Circuit Justice Harlan, writing the opinion, points out the necessity oftimes arising of keeping a corporation upon its feet and enabling it to continue the transaction of its business, and that it may accept in such crisis financial assistance from one of its directors and secure the same by mortgage upon its property, "then loaned or advanced by him, or in that mode protect him against liability then incurred in its behalf by him." The court further says: "Of course, in cases of that kind, a court of equity will closely scrutinize the transaction, and, in a contest between general creditors and a director or managing officer who takes a mortgage upon its property, will hold the latter to clear proof that the mortgage was executed in good faith, and was not a device to enable him to obtain an advantage for himself over those interested in the distribution of the mortgagor's property."

And he also points out the different considerations when an insolvent corporation, having no expectation of continuing its business, mortgages its property to secure a debt previously incurred by one of its directors, or gives him a preference.

In Lippincott v. Shaw Carriage Co. (C. C.) 25 Fed. 586, the court considers the question of whether a preference attempted to be given was invalid because two of the directors giving the mortgage were liable as indorsers upon the notes secured thereby, and says: "The weight of authority seems to be in support of the affirmative of this proposition."

In Re Lake Chelan Land Co. 5 A.L.R. 557, 168 C. C. A. 504, 257 Fed. 500, it was held that an in

solvent corporation in need of funds and ready cash may borrow the money needed from a director, and secure it by lien on its property. In this case the court says: "We find no foundation for the argument that the money loaned by Green and Tyler was to enable the company to pay its antecedent debt." That distinguishes the case quite readily from the case at bar. Had it not only been a past debt, but a past debt in part illegal, it is probable the language of the court would have been quite different. In Koehler v. Black River Falls Iron Co. 2 Black, 715, 720, 721, 17 L. ed. 339, 342, referring to a transaction whereby directors had secured their own debts, to the injury of stockholders and creditors, the court said: "Instead of honestly endeavoring to effect a loan of money, advantageously, for the benefit of the corporation, these directors, in violation of their duty, and in betrayal of their trust, secured their own debts, to the injury of the stockholders and creditors."

And in Thomas v. Brownsville, Ft. K. & P. R. Co. 109 U. S. 522, 27 L. ed. 1018, 3 Sup. Ct. Rep. 315, the action of the directors was denounced by the court as "utterly indefensible."

ties for knowing the condition of the company than have the other creditors, and he ought not to be permitted to use that position to benefit himself at their expense. A few states have held that a preference to themselves by directors of an insolvent institution is valid. The most notable is the case of Nappanee Canning Co. v. Reid, M. & Co. 159 Ind. 614, 59 L.R.A. 199, 64 N. E. 870, 1115. The force of that opinion, however, is much weakened by the strong dissenting opinion of Judge Hadley, which seems to us the better law. A few other states are in accord with the doctrine thus announced in the Indiana case. however, commented rather emphatically in condemnation of situations where directors have used their position to benefit themselves at the expense of others, and from New Hampshire to California there has been almost a universal note of condemnation for such practice. In Fishel v. Goddard, 30 Colo. 147, 69 Pac. 612, the court says: "It is not good morals or good law."

The courts have,

A case very similar to this is Taylor v. Mitchell, 80 Minn. 492, 83 N. W. 418. There a mortgage was made by the directors, they being creditors, on the corporate property, to themselves, to secure their debt. The corporation was insolvent at the time. The court held that the mortgage was fraudulent as to creditors and (80 Minn. on page 496) said: "It may be conceded that when, in the ordinary course of business of a solvent corporation, money becomes due to one of its directors, he may rightfully receive payment or security therefor, or prosecute all proper remedies to secure such payment, provided that in so doing he acts in good faith, and in no manner for the corporation. But when the corporation is insolvent, its directors who are its creditors cannot secure to themselves any advantages or preference over other creditors. They cannot thus take advantage of their fiduci

ary relation, and deal directly with themselves, to the injury of others in equal right. If they do, equity will set aside the transaction at the suit of creditors of the corporation, or their representatives, without reference to the question of any actual fraudulent intent on the part of the directors, for the right of the creditors does not depend upon fraud in fact, but upon the violation of the fiduciary relation of the directors."

See also Booney v. Tilley, 109 Cal. 346, 42 Pac. 439; Atlas Tack Co. v. Exchange Bank, 111 Ga. 703, 36 S. E. 939; Hays v. Citizens' Bank, 51 Kan. 535, 33 Pac. 318; James Clark Co. v. Colton, 91 Md. 195, 49 L.R.A. 698, 46 Atl. 386; Taylor v. Fanning, 87 Minn. 52, 91 N. W. 269; Symonds v. Lewis, 94 Me. 501, 48 Atl. 121; King v. Wooldridge, 78 Miss. 179, 28 So. 824; Williams v. Turner, 63 Neb. 575, 88 N. W. 668; Graham v. Carr, 130 N. C. 271, 41 S. E. 379; Olney v. Conanicut Land Co. 16 R. I. 597, 5 L.R.A. 361, 27 Am. St. Rep. 767, 18 Atl. 181.

As we have heretofore indicated, there is a distinction between a preference to a director, and merely securing a director for money which he may have advanced to keep the concern alive. It is recognized that a corporation may be in extremis. A director may help to keep it going, may lend it money or credit, and take security therefor. This is not to the injury of creditors, but for their benefit, and is not under the condemnation of the law; but it is an entirely different matter when a corporation is insolvent, and the directors secure a past indebtedness by taking a mortgage to themselves of all the assets of the corporation, not to help the corporation, but to protect themselves. where security is given by the corporation to a director for money or credit advanced to keep the concern burden of from failure, the proof burden is on the secured director to show the good

Evidence

good faith.

Even