court will not permit any inquiry into the question of the honesty or fairness of the transaction." Then it is stated that the "philosophy of this rule" is that temptation may be avoided by the trustee, and that "the value of the rule of equity . . . lies to a great extent in its stubbornness and inflexibility.'

It will also be observed that these are rules in equity. Then follows a discussion of a number of California cases which apparently do not entirely coincide with all these general statements, maintaining that there is no actual conflict.

The logical result of these principles, if they are or should be principles, is that the money is lost. But this would be robbery. The firm adherence to logic (based on more or less erroneous postulates) in the earliest cases in other jurisdictions did result in robbery. The conscience of mankind, and also of the courts, protested. Throwing away logic, though still protesting adherence to it, equity sought escape by bringing in the doctrine of "quantum meruit," which had been used by it in some other kinds of cases. Having said these transactions, without regard to their honesty or fairness, were a fraud, the new logic says there is so much that is good, beneficent, and meritorious in this fraud that the guilty party should be rewarded for it by giving him back his money with interest; which is all he asked or desired in the first instance.

They also applied the doctrine of "rescission of contracts," where unjust and unconscionable results followed the declaring of contracts with corporations void, requiring the corporation to restore what it received by the contract.

They also said that, in many cases, circumstances and facts often of a very trivial character amounted to a ratification of the contract.

Cal. Corp.-18

PURCHASING CLAIMS AGAINST THE CORPORATION

A director can not purchase claims against his corporation at a discount and enforce them against it at their full value; he can recover only what he paid for them. This is true also as between him and the creditors of an insolvent corporation.38 But where a minority of the directors, in order to protect their own interests and those of the corporation, purchase claims against it at their full face value, the corporation and stockholders being advised of that fact and given full opportunity to redeem, they may purchase the property of the corporation at execution sale upon a judgment upon such claims. There is nothing in the law "which makes a transaction between a director and his corporation in which the former has a personal interest ipso facto void. Such a transaction is subject to rigid scrutiny and is voidable for any fraud or violation of the duties of their trust upon the part of the directors," and the burden of proof is on him who alleges fraud.34

A secretary and managing agent can not secretly buy up claims and through them secretly acquire title to the property of the corporation; he will be held to be a trustee for the corporation and upon being reimbursed the amount paid out by him with interest will be compelled to convey the property to the corporation.35

But if he really never became a director, de jure nor de facto, he is not prevented from acquiring title to the corporation's property at a judicial sale.3

36

In a case which was cited as an authority in the Pacific Vinegar Works case, supra, the corporation owing a certain sum of money, the directors who owned

33 Bonney v. Tilley, 109 Cal. 346, 42 Pac. 439; Sullivan v. Triunfo Gold etc. Min. Co., 39 Cal. 459.

84 Snediker v. Ayers, 146 Cal. 407, 80 Pac. 511.

35 San Francisco Water Co. v. Pattee, 86 Cal. 623, 25 Pac. 135. 36 Rozecrans Gold Min. Co. v. Morey, 111 Cal. 114, 43 Pac. 585.

all the stock unanimously resolved that the corporation borrow that sum, and that the president and secretary execute a mortgage on its property securing the loan, the money to be applied to the payment of the debt. Instead of the corporation borrowing the money from other parties, the president purchased the debts, in the name of a partnership firm of which he was a member, and he and the secretary in the presence of all of the directors, as the secretary testifies, which is uncontradicted, executed the notes and mortgage to the partnership securing the same. The court says, "this was clearly unauthorized by the resolution. The position of [the president] as a member of the firm, and his position as trustee and president of the corporation were inconsistent. It was to his interest to buy them [the claims] at as great a discount as possible. The greater the discount the greater the gain. If he succeeded in purchasing the debts at any discount, to that extent he secured to himself an advantage not common to all of the stockholders. In this par

ticular case it does not appear that [the president] secured the demands against the corporation at any discount, neither does it appear that he did not. Nor does the policy of the law permit any inquiry into that question." The note and mortgage were excluded as evidence and the judgment of the court below was for the corporation, which judgment was affirmed on appeal.37

PURCHASING PROPERTY OF CORPORATION SECRETLY

The conditions underlying a secret purchase of property from the corporation by a director or officer are

87 Davis v. Rock Creek etc. Min. Co., 55 Cal. 359, 36 Am. Rep. 40. In the quotation from this case in Pacific Vinegar etc. Works v. Smith, 145 Cal. 352, 364, 104 Am. St. Rep. 42, 78 Pac. 550, the words from the decision, "secured the demands," last appearing above, are erroneously quoted as "assumed the demands."

fundamentally and widely different from a loan of money by them to the corporation.

The amount of the loan is received by the corporation, and is accurately measured in dollars, but the value of property is often so uncertain that opinions about it differ widely. The rule therefore has grown up that, at the election of the corporation,38 all such transactions will be set aside. The corporation must restore what it has received by the sale, but if it is unable then to do so the courts declare that the officer took the property in trust for the corporation, and order it sold, and, after reimbursing the officer the amount paid by him to the corporation, direct that the balance be turned over to the corporation. It may be said that every such secret purchase is either an actual or constructive fraud on the corporation.

PURCHASING PROPERTY FOR CORPORATION-SECRET PROFITS

A vice president purchased and secretly held a property which, five days later, he sold to his corporation at a large profit. No director or stockholder had talked with him about the matter until the board meeting which made the purchase, although he used his influence in the board meeting to induce them to buy it. The corporation, electing not to rescind its purchase, sued to recover the secret profits; this it could not do because the court said the purchase five days before was as good as if made at any time, however long, before the corporation purchased.39 Without doubt, it could have

rescinded the purchase.

38 Dundon v. McDonald, 146 Cal. 585, 80 Pac. 1034; Woodroof v. Howes, 88 Cal. 184, 26 Pac. 111.

39 Highland Park Inv. Co. v. List, 27 Cal. App. 761, 151 Pac. 162.

AUTHORITY UNDER BY-LAWS AND RESOLUTIONS

If the by-laws require contracts with reference to real estate to be signed by both the president and secretary, if no different course of business is shown, one signed by the president alone is insufficient, and the unauthorized acceptance of a cash payment by an agent so employed does not estop the corporation from rejecting the contract.40 Where, however, it was shown that it had been the custom of the president to indorse promissory notes, the corporation was bound;1 such a by-law is not restrictive or a limitation.

It was also said in the preceding case that a by-law that the president shall have direction of the affairs of the corporation, subject to the advice of the directors, does not enlarge his powers.

A deed to the president of the corporation, executed by the president himself pursuant to a resolution of the board of directors, shows that the president was acting as the instrument of the corporation and is not void as against public policy.42

RATIFICATION OF PRESIDENT'S ACTS

A note and mortgage, though properly executed, but invalid because there was no authority in the by-laws or in a resolution of the board of directors, may be ratified by the corporation retaining the benefits of the loan,

10 Black v. Harrison Home Co., 155 Cal. 121-126, 99 Pac. 494; Bliss v. Kaweah Canal etc. Co., 65 Cal. 502, 4 Pac. 507; and the authority of agents must appear, Salfield v. Sutter County Land etc. Co., 94 Cal. 546, 29 Pac. 1105.

41 Sferlazzo v. Oliphant, 24 Cal. App. 81, 140 Pac. 289.

42 Fudickar v. East Riverside Irr. Dist., 109 Cal. 29, 41 Pac. 1024.