Opinion ID: 2614193
Heading Depth: 1
Heading Rank: 3

Heading: corporate fiduciary undisclosed profits

Text: It is widely held that a director while engaged in a transaction for his corporation cannot retain an undisclosed profit. The rule set forth as follows is exemplary of this principle: Unless otherwise agreed, an agent who makes a profit in connection with transactions conducted by him on behalf of his principal is under a duty to turn over such profits to his principal. This same rule applies with equal force to corporate directors who must account to the corporation for any undisclosed profit regardless of what it is called. Hornstein, Corporation Law and Practice, § 442. 3, Fletcher, Cyclopedia Corporations, § 884, states the rule as follows: Directors and other officers of a private corporation cannot either directly or indirectly, in their dealings on behalf of the corporation with others, or in any other transaction in which they are under a duty to guard the interests of the corporation, make a profit for themselves, or acquire any other personal benefit or advantage, even though such officer or director may own practically all of the stock of the corporation, and if they do so, they may be compelled to account therefor to the corporation in an appropriate action. Heit v. Bixby, 276 F. Supp. 217, 225 (E.D.Mo. 1967). The above Bixby case cites as authority 3 Fletcher, Cyclopedia of Corporations (1965). Included in that treatise is a distinctly applicable section to the activity that occurred in the case at hand. § 899.  Sales or leases by or to the corporation. A director or other officer or agent will not be permitted to retain profits he may have made in the sale or lease of property by or to his corporation. The cases in which corporate officers have been held liable for profits, upon this trust principle, have generally arisen where, in the acquisition or disposition of property for the corporation, the officer has received personally a profit, as where he has    received a secret bonus or advantage in the transaction in which he has acted for the corporation. Generally it is held that a director will not be permitted to receive and retain a commission or other secret profit or advantage in the case of a sale or lease of property by or to the corporation. The Restatement of Restitution, § 197, comment c at 809-810, speaks directly to the facts of the instant case and explains the rationale of the law in this area: c. Where no harm to beneficiary. The rule stated in this Section is applicable although the profit received by the fiduciary is not at the expense of the beneficiary. Thus, where an agent to purchase property for his principal acts properly in making the purchase but subsequently receives a bonus from the seller, he holds the money received upon a constructive trust for his principal. The rule    is not based on harm done to the beneficiary in the particular case, but rests upon a broad principle of preventing a conflict of opposing interests in the minds of fiduciaries, whose duty it is to act solely for the benefit of their beneficiaries. It is a well established rule both in Hawaii and in a majority of the States that the relation of directors to the corporations they represent is a fiduciary one. Lum v. Kwong, 39 Haw. 532, 538 (1952); Bolte v. Bellina, 15 Haw. 151, 153 (1903). As such, the conduct of Pablo falls squarely within the above enumerated rule. He was acting solely in his fiduciary capacity as a corporate director when he participated in the transactions from which he received the undisclosed commissions.