icy, and that it tended to constitute a breach of duty on the part of an officer of a corporation. These contentions are all disputed by the appellant.

This court, early in its existence, firmly declared its allegiance to the trust-fund theory; that is, that the

Corporations:

assets as

trust fund.

assets of an insolvent corporation are a trust fund for the benefit of all of its creditors, and that no creditor can secure a preference over others. Thompson v. Huron Lumber Co. 4 Wash. 600, 30 Pac. 741, 31 Pac. 25; Conover v. Hull, 10 Wash. 673, 45 Am. St. Rep. 810, 39 Pac. 166. No court has been more consistent in adhering to that doctrine, and none has gone farther in applying it. But we feel that the limit of its extension has been reached, and to further widen its scope is to impair the doctrine itself and to unjustly hamper the operation of a corporation, which, in good faith, may be attempting to weather a financial storm, or struggling corporations attempting to start upon their commercial voyages. It would be unwise to apply the doctrine so vigorously that such corporations could not obtain financial relief by giving security to those who might be willing to extend help if they could be protected. It is common knowledge that many a struggling concern could be placed upon a Sound financial foundation if it might, in exchange for the needed help, use its assets without the danger that if the attempt prove unsuccessful those assets would be taken back from the person extending the relief, and he be compelled to share with the general creditors in what might be distributed under a receivership. This, court has never said, and is now unwilling to say, that

where a bona fide transaction is entered into between an insolvent corporation and a

-extending assistance to insolvent corporation for security.

person willing to exchange for the

company's assets the needed financial assistance, that such agreements are

38 A.L.R.-7.

illegal or void, for the reason that they constitute a preference. Та hold otherwise would compel the repayment of all sums paid by an insolvent corporation in exchange for any labor or material. The basis upon which the trust-fund doctrine rests is that one creditor during insolvency has caused a depletion of the assets of the insolvent concern to the detriment of the other creditors. Where there has -when trustbeen no depletion, fund theory the basis of the doctrine has been removed; and therefore, where a present valuable consideration passes to the insolvent corporation from the creditor, the amount paid by, or secured from, the insolvent to such creditor, cannot constitute a preference.

does not apply.

The Supreme Court of the United States, in Fogg v. Blair, 133 U. S. 534, 33 L. ed. 721, 10 Sup. Ct. Rep. 338, discussing the trust-fund doctrine, said: "That doctrine only means that the property must first be appropriated to the payment of the debts of the company before any portion of it can be distributed to the stockholders; it does not mean that the property is so affected by the indebtedness of the company that it cannot be sold, transferred, or mortgaged to bona fide purchasers for a valuable consideration, except subject to the liability of being appropriated to pay that indebtedness. Such a doctrine has no existence."

In Breed v. Glasgow Invest. Co. (C. C.) 71 Fed. 903, a corporation while insolvent conveyed land in exchange for money advances, and, upon a receiver being appointed, a general creditor claimed

that the deed to secure the loan

should be decreed to inure to the benefit of all the creditors.

The

court held that the deed was valid, since it was given to secure a debt contracted at the time, and that there was no equitable principle compelling the security created for the money advanced to be distributed for the benefit of all the creditors, the court saying: "The object of

the Virginia statute [which is but a statutory enactment of the trustfund doctrine] on which this proceeding is based, is to prevent a private corporation from giving a preference to one or more creditors by encumbering its property in their favor, where all the creditors stand upon the same footingwhere all are equally entitled to share in the assets of the corporation for the payment of their debts.

But grant that it was an insolvent corporation when said deed of trust was given, the doctrine, as applied by the courts to insolvent corporations, has never been carried so far as to allow a court of equity to invade a security taken by a vendor to secure the purchase money for the property sold, and to subject this property, or its proceeds, to a ratable distribution among all the creditors of an insolvent corporation. The court is at a loss to see why it should do so. Selling the property to the corporation, and reserving a lien on the property to secure the purchase money, is not an act that in itself works detriment to the general creditors of the corporation. It is because of the injury done to the other creditors that a corporation is forbidden to prefer one general creditor to another. It is very plain that this reason does not apply in case of a vendor selling property, and the corporation creating a lien on such property to secure the payment of the purchase money."

To the same effect see 14a C. J. This court, in Lloyd v. Sichler, 94 Wash. 611, 162 Pac. 979, recognized the right of a creditor whose transaction with the company did not modify or change the relation of the parties to the disadvantage of other creditors to make such an arrangement. In such cases the trust fund is in no way depleted, the assets of the company are not lessened, but are merely changed in character, and, in the instant case, in place of accounts collectable under a contract, the company received cash with which it was able to pay for

the labor of its workmen and persons who had furnished materials and supplies. As a matter of fact, by the contract the assets of the company were preserved in a great deal better condition than they would otherwise have been.

The next contention is that the contract is void because the appellant stood in a fiduciary position to the company, and the general rule is stated that directors and officers of a corporation cannot enter into contracts with a corporation which tends to place them under an inducement to disregard their duty, and to take a position affecting the actions of the corporation which will be for their interest and against that of the stockholders and creditors. The rule, as applicable to the facts here, is stated in 14a C. J. p. 908, as follows: "A failing corporation may give security to an officer or director for present advances made in good faith and honestly, to assist in its business, but conveyances of this character are subject to severe scrutiny by the courts."

The circuit court of appeals for the ninth circuit, in Re Lake Chelan Land Co. 5 A.L.R. 557, 168 C. C. A. 501, 257 Fed. 497, in a case arising in this state, held that there was no authority in this state for holding that a mortgage given by an insolvent corporation for a present advance is not valid, and decided that "an insolvent corporation, in need of funds and ready cash, may borrow the amount needed from a director or other officer of the corporation, and secure it by lien on its property or transfer of its assets." (Syllabus.)

And that such a transaction, being in good faith, the corporation subsequently going -right of into bankruptcy, officer to take could not be ques- security. tioned on the ground that it was a preference, and had been entered into between the corporation and one of its officers.

The Supreme Court of the United States, in Twin-Lick Oil Co. v. Mar

bury, 91 U. S. 587, 23 L. ed. 328, 3 Mor. Min. Rep. 688, held, as stated in the syllabus of that case, that "a director of a corporation is not prohibited from lending its moneys when they are needed for its benefit, and the transaction is open and otherwise free from blame; nor is his subsequent purchase of its property at a fair public sale by a trustee, under a deed of trust executed to secure the payment of them, invalid."

In the course of the opinion the following is said: "So, when the lender is a director, charged, with others, with the control and management of the affairs of the corporation, representing in this regard the aggregated interest of all the stockholders, his obligation, if he becomes a party to a contract with the company, to candor and fair dealing, is increased in the precise degree that his representative character has given him power and control derived from the confidence reposed in him by the stockholders who appointed him their agent. If he should be a sole director, or one of a smaller number vested with certain powers, this obligation would be still stronger, and his acts subject to more severe scrutiny, and their validity determined by more rigid principles of morality, and freedom from motives of selfishness. All this falls far short, however, of holding that no such contract can be made which will be valid; and we entertain no doubt that the defendant in this case could make a loan of money to the company."

The supreme court of Wyoming, in Harle-Haas Drug Co. v. Rogers Drug Co. 19 Wyo. 35, 113 Pac. 791, Ann. Cas. 1913E, 181, said: "It is contended that the mortgage was executed by an insolvent corporation to one of its directors, and was therefore void as to other creditors. The 'trust-fund' doctrine is invoked in support of that contention. The principle is well settled that 'a corporation acting in good faith and without any purpose of defrauding its creditors, but with the sole ob

ject of continuing a business which promises to be successful, may give a mortgage to directors who have lent their credit to it in order to induce a continuance of that credit.

The next reason advanced for the illegality of this contract is that the security turned over to the appellant was not delivered at the time of the advance, and that therefore the doctrine that an officer of an insolvent corporation may advance money for the benefit of the company, to be used by it in paying its creditors, and enable it thus to continue business, and may take security at the time for the reimbursement of such advances, provided such advances are made in good faith, does not apply, for the reason that the advances were made prior to the taking by him of the security. security. The answer to this is that the agreement must be looked to, to determine what was the real situation. It was there provided that, for advances to be subsequently made by the appellant, he was to receive assignments of various contracts as they came into existence. By the very nature of the business they were not in existence at the time the agreement was made. The assignments were made under the terms of the contract as soon as money which could be assigned was due on those contracts. Since the parties intended to make specific security for the advances, even though the assignment or the transfer of the security was not made at the actual moment the money was lent to the company, yet equity will impress the property with the obliga- to assign assets tion created by the when money contract, and compel the observance of the contract's terms. Bach v. Smith-Pattison Mfg. Co. 31 Ohio C. C. 258. In Re Farmers' Supply Co. (D. C.) 170 Fed. 502, the syllabus reads: "Where a party by express agreement sufficiently indicates an intention to make specific property a security for a debt or other obligation,

-effect of failure

advanced.

and promises to transfer such property as security, equity impresses the property with an equitable lien in case security is not given."

Consequently, we have not here a case where the creditor is receiving security or being paid for an antecedent debt. The creation of the debt and the payment of it were, by this agreement, in legal effect contemporaneous acts.

Respondent also attacks the agreement as, and the trial court, in its conclusions of law, found it to be, "void as against public policy." It is difficult to understand exactly what is meant by this, unless it merely means that the contract is void because of the reasons already stated; that is, that it was in violation of the trust-fund doctrine, or was such a contract as an officer of a corporation could not enter into between himself and his corporation. The declaring of contracts void as against public policy is a dangerous thing. We find a contract here which is not made illegal by any statute, which was not made in restraint of trade, interferes with none of the functions of government, which is not immoral, but which merely provides for aid to a corporation seeking to escape financial difficulty. It is hard to see in what way such a contract contravenes any public public policy. It cannot corporate assets be such a contract,

Contractsassignment of

-public policy. when its inception is valid, becomes invalid because the purpose for which it was entered into does not succeed. 6 R. C. L. 711 lays down the rule, and it is also stated in 13 C. J. 427, as: "It is clearly to the interest of the public that persons should not be unnecessarily restricted in their freedom to make their own contracts; and therefore agreements are not to be held void as being contrary to public policy unless they are clearly contrary to what the legislature or judicial decision has declared to be the public policy, or they manifestly tend to injure the public in some way."

In Hartford F. Ins. Co. v. Chicago, M. & St. P. R. Co. 30 L.R.A. 193, 17 C. C. A. 62, 36 U. S. App. 152, 70 Fed. 201, the syllabus reads: "The public policy of a state or nation must be determined by its constitution, laws, and judicial decisions; not by the varying opinions of laymen, lawyers, or judges as to what the interest of the public demands. A party who seeks to put a restraint upon the freedom of contract in any case must make it plainly and obviously clear that the contract in question is against public policy."

In Burne v. Lee, 156 Cal. 229, 104 Pac. 442, the supreme court of California declares that "if [the agreement] can be accomplished in any legal method, it must be assumed that that method was in the contemplation of the parties when the contract was made, and will be pursued." Fraud is not presumed.

It follows, therefore, that the contract here was valid and not subject to attack upon any grounds urged by the respondent, and is binding. It provides nothing more than that a person, even if he is an officer of an insolvent corporation, may advance money for the benefit of that insolvent corporation to pay its debts and enable it to continue business, and that he may take for such advances security to reimburse him for them, provided, of course, that the whole transaction is entered into in good faith.

The action of the trial court in holding this contract illegal and void is reversed, and the action dismissed.

Main, Ch. J., and Tolman, J., con

cur.

Fullerton, J., concurs in the result.

Holcomb, J., dissenting:

There is no necessity for the apparent animadversion upon the trust-fund doctrine followed in this state in the majority opinion. We have been most consistent in applying the trust-fund doctrine only to corporations which had become in

An all-sufficient reason for the result arrived at by the majority is that the agreement entered into in this case was entered into between two private individuals before any corporation was formed, or any corporation became insolvent. Advances made by appellant under his agreement with Vaughn were made

poration to begin operations, and, as a matter of course, were nothing more nor less than actual working capital.

Therefore, while I cannot concur in much of the reasoning in the majority opinion, I concur in the result.

Petition for rehearing denied.

The earlier cases on this question are discussed in the annotation in 5 A.L.R. 561, and 19 A.L.R. 1087.

Generally as to the right of a corporation to prefer creditors, see annotation in 19 A.L.R. 320, which is supplemented by the annotation following Nelson v. Jones, ante, 90.

The rule stated in the annotation in vol. 5, at p. 561, that, in the absence of a statutory restriction, the corporation may, although insolvent, secure a director or other officer for a contemporaneous loan made to it fairly and in good faith, is sustained in recent cases.

Thus, a mortgage given to a director who indorsed the company's note at a bank, given to secure a loan at a time when, although the company was not insolvent, it was in need of ready cash to meet its obligations, was sustained in Flockhart Foundry Co. v. Cox Automatic Pipe Bending Co. (1923) N. J. Eq., 123 Atl. 151, affirmed in (1924) N. J., 124 Atl. 925.

In Reed v. Helois Carbide Specialty Co. (1902) 64 N. J. Eq. 231, 53 Atl. 1057, a mortgage made in contemplation of the insolvency of a corporation, and given to one who was a director at the time when the decision to make the mortgage was made, but who resigned a few days before it

was actually given, was sustained in so far as it secured a consideration then passing to the corporation.

The court in Stuart v. Larson (Fed.) ante, 79, recognizes the validity of security given by a corporation to its directors or officers for a contemporaneous loan, made in good faith.

A mortgage given by a corporation to the directors to secure a contemporaneous loan at a time when the corporation was in financial difficulty was held to be at the most voidable, in McClean v. Bradley (1924) 299 Fed. 379, upon prompt action by the stockholders, who were the complaining parties, no creditors' rights being involved. There being no prompt repudiation of the mortgage by the stockholders, the validity was sustained.

The court in Re Lamie Chemical Co. (1924) 296 Fed. 24, recognizes the right of a corporation to secure its officers and directors from loss arising from advances made to and indorsements on account of the corporation, where it is believed in good faith that, by such a transaction, the corporation can escape financial disaster; but this statement is confined to a going, solvent corporation. The mortgage given in this case was held invalid for other reasons. W. A. E.