Case Name: Francis P. Sisk, Administrator, vs. The Jordan Company et al. (William J. Jordan vs. The Jordan Company et al.)
Court: Connecticut Supreme Court
Jurisdiction: Connecticut
Decision Date: 1920-03-05
Citations: 94 Conn. 384
Docket Number: 
Parties: Francis P. Sisk, Administrator, vs. The Jordan Company et al. (William J. Jordan vs. The Jordan Company et al.).
Judges: 
Reporter: Connecticut Reports
Volume: 94
Pages: 384–403

Head Matter:
Francis P. Sisk, Administrator, vs. The Jordan Company et al. (William J. Jordan vs. The Jordan Company et al.).
Third Judicial District, Bridgeport,
October Term, 1919.
Wheeler, Beach, Gager, Case and Curtis, Js.
A director of a corporation occupies a position of trust which he will not be permitted to use for his own personal profit. While his contracts and dealings with the corporation are not void, they are voidable unless they are open, made in good faith, fair, and fully understood. The least appearance of unfairness in the transaction — irrespective of good intention and lack of actual fraud— will suffice to set it aside in a court of equity. Furthermore, the burden of affirmatively proving the existence of these requisites in a given case, rests upon the director himself'and not upon the corporation or its representative.
In the present case the plaintiff, a director, furnished his company with financial assistance by discounting its customers’ notes, by indorsing its renewal notes, and by purchasing some of the company’s real estate, in return for which he received or was credited with commissions and bonuses, and also made substantial profits on the real estate so taken over. Later the company went into the hands of a receiver and the plaintiff presented his account which, after a hearing and report by the committee, was allowed to the amount of $22,892. Upon an appeal to this court by the receiver it was held:—
1. That inasmuch as it appeared from the finding of the committee that no evidence was presented as to whether or not the amounts charged were reasonable for the assistance extended by the plaintiff, and none as to the reasonableness or otherwise of the prices paid by the plaintiff for the real estate, the plaintiff had not sustained the burden of proof placed upon him by reason of his relation as a director of the corporation, in the absence of which his claim could not properly be allowed. (One judge dissenting.)
2. That the facts as found did not justify the conclusion reached by the trial court, that the plaintiff dealt at arm’s length with the company. {One judge dissenting.)
3. That the fact that the company realized a benefit from the plaintiff’s dealings with it was not the decisive test: it must affirmatively appear that the consideration received by the plaintiff was fair and equitable.
4. That no burden rested upon the receiver to show actual fraud, in order to attack or avoid the transactions in question.
5. That the finding as to the real estate profits accruing to the plaintiff, based solely upon the values existing at the time of the hearing, did not furnish the data necessary for determining the character of these dealings.
6. That there was no basis in the committee’s report for the conclusion, reached by the trial court as an additional basis for its decision, that the corporation had ratified these transactions.
7. That the cause must be referred back to the committee for a further hearing, in the light of the rules of law above stated.
Argued November 6th, 1919
decided March 5th, 1920.
Application in receivership proceedings by an alleged creditor praying for the allowance of his claim, brought to the Superior Court in New Haven County. and referred to a committee who found and reported the facts; the court (Keeler, J.) recommitted the report for a further hearing and upon the return of the supplemental report judgment was rendered (Warner, J.) in favor of the claimant for $21,442, from which the receiver of the Jordan Company appealed.
Error, judgment set aside and cause remanded.
The committee reported upon the claim as follows: The Jordan Company was a Connecticut corporation; its business had increased to such an extent that it was in need of funds on account of insufficient capital. Not being able to obtain sufficient funds through its banks, it sought financial assistance from the claimant Sisk. Sisk was elected a director of the Jordan Company on January 25th, 1915, and the financial transactions between Sisk and the Company after he became director were as follows: (a) Customers of the Jordan Company gave to it their notes in the usual course of business. While he was a director the company paid or credited Sisk on his account with $3,226.60 for discounting said notes before maturity to the amount of $33,233.92. In many of these cases Sisk was credited with a discount, or allowed interest in addition to the said bonus or commission, (b) Notes of the customers of the Jordan Company were delivered to Sisk before maturity and discounted by him, amounting to $36,-867.33, for which he was credited or allowed commissions of $2,410.34, and Sisk rediscounted these notes at his own bank, (c) Sisk lent to the company his credit as indorser to renewals of three notes of $15,000 each, and received therefor $3,500 as commissions, (d) Sisk, while a director, agreed with the Jordan Company that customers’ notes taken by him to the amount of $2,300 should be taken back by it, and he was credited with a bonus or commission for such service of $200. (e) After Sisk became a director, the Jordan Company sold to him: (1) a house on Orange Street for $9,000, upon his agreement to resell within six months for $9,500. Sisk stills owns this property, which is now worth $10,500. (2) The equity in a Dixwell Avenue piece, on November 18th, 1916, for $2,0Q0, and allowed him a commission of $450 for purchasing the same. On January 4th, 1917, Sisk sold this equity at a profit to himself of $1,450 over and above the commission of $450. (3) On April 19th, 1915, its interest in three pieces on Farren Avenue for $1,500, and on September 7th,' 1917, Sisk sold his said interest at a profit over what he had paid of $1,683.99. (4) On April 19th, 1915, its interest in a piece of land on Townsend Avenue for $1,250. In April, 1918, Sisk sold his interest in a part of this piece for $800, and still has said interest in the balance, which, at the date of hearing, was worth $1,750; so that Sisk’s profit at this time was $1,050 on this transaction. (5) On January 15th, 1917, its interest in a piece of land in Edgewood Park for $400. At the time of hearing Sisk still owned said interest which was worth $500 more than when he purchased it. The total profits, actual and estimated, on the fore going real estate transactions, were $6,183.99. There was no evidence before the committee to show that the said prices paid by Sisk were unfair or inequitable, (f) The Jordan Company gave to Sisk, as security for a check of $1,290 given him, an automobile. The check was never paid and was credited in the claim allowed Sisk, and Sisk sold the automobile for $750, and he was debited with this.
From time to time Sisk and the Jordan Company effected an adjustment of their transactions. And on February 19th, 1917, at one of the adjustments, Sisk delivered his check for $900 to the Jordan Company; across one end of the check was written “In settlement of account to date.” This check was duly indorsed and cashed by the Company by its treasurer.
On said February 19th, Sisk owed the Jordan Company $10,134.29 on their running account. At the time of said settlement a check for $600 given Sisk by the Company and never paid, was omitted from consideration, and subsequently Sisk included this $600 as part of his claim. The committee finds that no settlement of the running account between Sisk and the Company was made at this time.
Sisk believed the Jordan Company to be solvent while he was a director.
In all cases the amount of the bonuses and commissions paid or credited to Sisk was determined by Jordan, the treasurer and president of the Company.
The banks at which the Jordan Company transacted its business charged only the regular discount of six per cent, and received no bonuses or commissions. Sisk was not acting for the Jordan Company in these transactions.
There was no evidence before the committee as to whether or not the amounts charged were reasonable compensation for the financial assistance extended by Sisk to the Company.
One of the purposes for which the Company was organized was to engage in real-estate business.
The receiver claimed Sisk occupied a fiduciary position toward the Jordan Company ahd could not make profit out of his dealings with it during his term of service as a director. The receiver claimed that the profits on the real-estate transactions should be set off against the claim of Sisk.
The committee found that Sisk was under no duty to the Jordan Company to account for profits from these real-estate transactions. The committee recommended that the claim of Sisk .for 122,892.85 be allowed.
The receiver remonstrated against the acceptance of the amended report because of certain rulings. To this remonstrance Sisk demurred.
The opinion states the issues raised by the demurrer to the remonstrance, so far as they are pressed on the appeal, and there is no occasion to give their detail.
Robert C. Stoddard and Frederick H. Wiggin, for the appellant (defendant receiver).
Walter J. Walsh, for the appellee (plaintiff).

Opinion:
Wheeler, J.
The claimant Sisk, while a director of the Jordan Company, had numerous and large financial dealings with it. In the running account between the Company and Sisk during this period, he was credited with cash bonuses or commissions as compensation for his indorsement of notes of the Company, for his checks given in exchange for the Company's checks, and for certain real-estate transactions. The Company also sold to Sisk its customers' notes before maturity, and credited Sisk with the difference between the sale price and the face of the notes as a commission or bonus. The committee found that "there was no evidence before it as to whether or not the amounts charged were reasonable compensation for the financial assistance extended by the claimant Sisk."
In its memorandum overruling certain grounds of demurrer to the remonstrance, the trial court held that the commissions, bonuses and discounts received by Sisk were in effect and law equivalent to loans of money on a present valuable consideration; and that the facts as found showed "that Sisk dealt at arm's length with the Company, and that his dealings were for its benefit in continuing the business, and that without his assistance the Company would have been in a very precarious condition." Upon the facts found, the court held these transactions could not be impeached except for actual fraud; and that the dealings of Sisk and the Jordan Company being open and free from blame, must be held valid. In addition, the court held that as to the stockholders and corporation, the facts found showed acquiescence in and ratification of the dealings with Sisk; and that the creditors, as represented by the receiver, had no greater right than the stockholders to set aside these transactions, unless they were proved fraudulent. Further, the court held that the receiver had the burden of proving fraud as to his counterclaim, and that this he neither had assumed nor sustained so far as appeared from the report.
A director is a fiduciary of the corporation and of its stockholders. He may not use that relation for his own profit. His contracts and dealings with his corporation are not void, but are voidable unless the transaction be open, in good faith, fair, and fully understood. Equity will scrutinize the dealing between the fiduciary and his cestui que trust with jealous care, and it will set aside the transaction with the utmost freedom upon the least appearance of unfairness. Neither good intention nor lack of fraud will avail to sustain the transaction. Our own decisions establish these rules in terms at once clear and decisive. Mallory v. Mallory Wheeler Co., 61 Conn. 131, 23 Atl. 708; Nichols v. McCarthy, 53 Conn. 318, 23 Atl. 93; Looby v. Redmond, 66 Conn. 444, 34 Atl. 102. And our rule is the rule of many other jurisdictions. Hallam v. Indianola Hotel Co., 56 Iowa, 178, 179, 9 N. W. 111; Proctor v. Farrar, 213 S. W. Rep. 469 (Mo.); Cowell v. McMillin, 100 C. C. A. 443, 457, 177 Fed. Rep. 25, 39.
But our decisions, and those of most of our States, go further and place upon the fiduciary, whenever the transaction with his cestui que trust is before a court, the burden of affirmatively showing that the transaction was entirely fair, made in good faith, for an adequate consideration and upon a full understanding. This burden arises, we have said, out of the trust relation. It is a rule of fairness. A fiduciary claiming a benefit from his dealing with his cestui que trust, should be made to prove that he dealt in fairness and under the conditions prescribed by law. The full knowledge of the transaction is within his possession; he can and he must assume the burden of its proof. This rule we applied in a transaction between a trustee and a cestui que trust. Nichols v. McCarthy, 53 Conn. 299, 319, 23 Atl. 93. And likewise in the case of a transfer by an heir to the administrator. State v. Culhane, 78 Conn. 622, 629, 63 Atl. 636.
Many cases in other jurisdictions adopt this rule and apply it to the case of directors. "Whenever it appears that a director has been dealing with his corporation, the burden is at once upon him to show that his dealings have been fair and honest; in other words, that the corporation has not suffered as the result of his acts." First Nat. Bank of Hilger v. Lang, 55 Mont. 146, 156, 174 Pac. 597, 600; Hanson Sheep Co. v. Farmers & Traders State Bank, 53 Mont. 324, 335, 163 Pac. 1151, 1154; Booth v. Land Filling & Imp. Co., 68 N. J. Eq. 536, 543, 59 Atl. 767; Ross v. Quinnesec Iron Mining Co., 142 C. C. A. 33, 39, 227 Fed. Rep. 337, 343; Drennen v. Southern States Fire Ins. Co., 164 C. C. A. 616, 630, 252 Fed. Rep. 776, 790; Pitman v. Elmore, 93 Mo. App. 592, 597, 67 S. W. 946; Woodroof v. Howes, 88 Cal. 184, 187, 26 Pac. 111; Sage v. Culver, 147 N. Y. 241, 247, 41 N. E. 513; 10 Cyc. 808, 813.
The ruling of the trial court was directly contrary to this almost universal rule of the burden of proof. The committee found that "there was no evidence before the committee as to whether or not the amounts charged were reasonable compensation for the financial assistance extended by the claimant Sisk," and it further found that "there was no evidence before the committee to show that the prices paid by Sisk to the Jordan Company for its interest in the foregoing pieces of real estate were unfair or inequitable." These findings indicate that Sisk has not sustained the burden of proof placed upon him by reason of his relation as director to the corporation, without which proof his claim cannot be allowed.
In his dealing with the corporation, both in his loans of money and credit, and in his purchases, the individual interest of Sisk and his fiduciary interest as director met, hence the burden was upon him to show that each of the transactions was fair and equitable. If Sisk shows that his services were at the time valuable to the corporation and shows what he fairly earned, in the absence of other circumstances of inequity, his claim, to that extent, should be allowed, since he will have' sustained the burden of showing the fairness of his dealing.
Judge Keeler, in sustaining the demurrer to the original remonstrance, interpreted the facts as showing that Sisk dealt at arm's length with the Company. The facts found do not lead to this conclusion. The trial judge emphasizes the benefit of Sisk's dealing to the corporation, but this is not the decisive test. The benefit rendered may have been undoubted, yet the consideration claimed for the service may have been unfair, and even unconscionable. The vital fact is, that the dealing appears affirmatively to have been fair. The trial court held that these transactions could not be attacked except for actual fraud; the authorities cited show the reverse. The receiver is not in the position of the ordinary plaintiff claiming a recovery for fraud. There was no burden on him to prove the fraud.
That Sisk, while a director, made a profit through transactions with his corporation, in the absence of proof by him of the fairness of the transactions, gave the receiver the right of avoiding them unless, indeed, the contracts on their face show their fairness.
Upon the demurrer to the amended remonstrance, Judge Warner adhered to the earlier ruling of Judge Keeler upon the bonuses and commissions arising out of the dealings other than the real-estate transactions, and overruled the demurrer as to the profit upon the Dix-well Avenue real-estate transaction, and sustained it as to the other transactions. In his memorandum Judge Warner says: "While there can be no question that the law will equally protect a director or other officer of a corporation who in good faith purchases property from it in his individual capacity, as well as an outsider, yet when the consideration apparently is inadequate, suspicion will be cast upon the transaction, and the burden rests upon such director to show the purchase was made in good faith for fair value." This accurately states the rule; but in its application to this and the other real-estate transactions, we think the learned judge failed to correctly apply it. Upon his purchase of the Dixwell Avenue land, Sisk received a commission of $450, and at the end of seven weeks he sold this at a profit of $1,450. The trial judge disallows the profit while allowing the commission. If Sisk made the profit unfairly, the receiver justly queries, why should he be paid $450 for doing it?
The committee finds that "there was no evidence before the committee as to whether or not the amounts charged were reasonable compensation for the financial assistance extended by the claimant Sisk." This finding is of no significance. The burden on Sisk compelled him to prove that the amounts he charged were reasonable and fair under the circumstances. The report of the committee does not show that these transactions were fair, nor give the facts from which this might be inferred. Until the value* of the several pieces of real estate, at the time Sisk took title from the corporation, appears, no basis is at hand to determine what, if any, profit there was, and whether or not it was unreasonable or unfair. The finding of the profit to Sisk upon the values as of the time of the hearing, does not furnish the necessary basis for determining the character of these transactions.
As to the commissions, the trial court held, as.an additional reason for its decision, that the corporation had ratified these transactions.
We do not so read the report of the committee. No one besides the president, treasurer and general manager of the corporation, and Sisk the director, participated in, or even knew of, these dealings. No one had the opportunity to question these transactions until the receiver took charge of the corporation. ' ' Ratification, " we said in Mallory v. Mallory Wheeler Co., 61 Conn. 131, 132 (23 Atl. 708), "ordinarily requires some positive assertive act. In order that acquiescence alone should become a ratification the delay must be so long continued that it can be accounted for only on the theory that there has been some affirmative act. . . . The delay must have been unreasonable; the stock holders . . . must have had an opportunity to act, and to act with perfect freedom. . . . And have been fully advised of all the material facts" in the case. The report of the committee does not reveal a ratification of this character. Moreover, the financial situation of the corporation might have been such that however binding the ratification would have been upon the stockholders, it could not affect the creditors. Not until the receiver took charge would they in fact have been represented by one having knowledge.
There is error, the judgment is set aside and the Superior Court is directed to overrule the demurrer to the remonstrance and refer the report to the committee for further finding as to each of the transactions referred to in the report, in accordance with this opinion.
In this opinion Beach, Case and Curtis, Js., concurred.