Mr. Justice Brewer,
after stating the case, delivered .the opinion of the court.
In the absence of any testimony, and in the manner in which this case was submitted for decision, it must be assumed that the matters alleged in the bill and not denied in the answer and the new matters set forth in the answer are true. And the question which arises is whether, upon these admitted facts, the decree in favor of the plaintiffs can be sustained.
' The manufacturing business in which the corporation was engaged was a new enterprise. It had been carried on for only about eighteen months. In that business ■ had • been invested nearly $300,000, and the property possessed by the corporation was at its cost price equal to the entire indebtedness. It thus appears that there . had been no waste, mismanagement, or loss. Not a dollar of the indebtedness was held by any director or stockholder, but the personal credit of the six directors and stockholders had been loaned to the company to the extent of $69,000. The corporation was still a going concern. There was no purpose of abandoning the business. ■ The indorsers believed that if the corporation could ■be tided over its temporary embarrassment it could be made successful. The stockholders authorized the mortgage. It was given only upon part of the property, and that part already encumbered by a fifty thousand dollar trust deed. The value of this property was, according to the subsequent appraisement, much below the sums secured by the trust deed and the mortgage. In addition the corporation had nearly $90,000 of unencumbered property to apply in satisfaction of the claims of its creditors. The mortgage was not given simply as security for a past indebtedness, but to induce- the
indorsers to obtain for the corporation a renewal or extension of its obligations, and to make further indorsements. In reliance upon this mortgage the indorsers secured renewals or extensions, or themselves took up the notes they had indorsed, and at the same time lent the credit of their names to new paper of the company. Thus they prevented a suspension of the business and enabled the corporation to continue its operations, and did so believing that by such continuance the corporation would be enabled to work itself out of its temporary difficulties. All this was done in the utmost good faith.
Under these circumstances, should the transaction be condemned and the mortgage held void as against creditors? This question, we think, must be answered in the negative. It is said that the directors of a corporation stand in a fiduciary relation to both the stockholders and the creditors. Whatever may be the extent of the fiduciary obligations of directors to stockholders, there can be no pretence in this case of a breach thereof. The mortgage was expressly authorized by the stockholders, and they cannot claim that the directors in executing the instrument, which they had themselves authorized, were guilty of any breach of duty to them. It is often said that the directors may not take advantage of their position and power to secure personal advantage to themselves, but that, proposition has no application here, for the corporation itself directed this mortgage. It was an application by the debtor' of its property to secure certain of its creditors, and not the act of the agents of a debtor to protect themselves. The case involves no breach of trust-on the part of the agent towards the principal, but more closely resembles the case of an individual debtor giving preferences to certain of his friends, and the genei’al rule is that, in the absence .of statute, a debtor has such
jus dispon endi
in respect to his property that, although insolvent and contemplating a cessation of business and the surrender of his property to his creditors, he may lawfully prefer certain of them, even though thereby others receive no payment.
But, passing from the relations of directors to the corpo
ration and its stockholders, it is one of the vexed questions of the law as to how far the duty of a corporation and its directors to creditors interferes with the otherwise conceded power of a debtor to prefer certain of his creditors. Into a discussion of this question in its length and breadth we deem it unnecessary now to enter, for the facts of this case remove many of the embarrassments that often attend such questions. This is not like the case of
Sutton Manufacturing Co.
v. Hutchinson, 63 Fed. Rep. 496, decided by the United States Court of Appeals for the Seventh Circuit, in which the directors of a corporation, insolvent and intending to discontinue business,.gave a mortgage to secure certain of their number who happened to be creditors, and thus attempted to secure a preference in behalf of themselves. Nor is it the case of the directors of a corporation in fact insolvent, though continuing and expecting to continue in business, executing a mortgage on the property of the corporation to simply secure themselves for a past indebtedness ; for here the corporation, although insolvent within the rule which declares that insolvency exists when a debtor has not property sufficient to pay Ids debts, was still a going concern and intending to continue its business, and the mortgage was executed not simply to secure directors and stockholders for past indebtedness but to induce them to procure a'renewal or extension of paper of the company then maturing or about to mature, and also to obtain further advances of credit.
Will it be doubted that, if this mortgage had been given directly to the holders of these notes, it would have been valid ? Are creditors who are neither stockholders nor directors, but strangers to a corporation, disabled from taking security from the corporation by reason of the fact that upon the paper they hold there is also the. indorsement of certain of the directors or stockholders? Must, as a matter of law, such creditors be content to share equally with the other creditors of the corporation, because, forsooth, they have also the guarantee of some of the directors or stockholders, whose guarantee may or may not be worth anything?
But’ even that is not this case, for here the corporation was
a going concern and intending to continue in business, and the mortgage was given with a view of enabling it to so continue, and to prevent creditors whose debts were maturing from invoking the aid of the courts to put a stop thereto. Can it be that, if at any given time in the history of a corporation engaged in business, the market value of its property is in fact less than the amount of its indebtedness, the directors, no matter what they believe as to such value, or what their expectations as to the success of the business, act at their own peril in taking to themselves indemnity for the further use of their credit in behalf of the corporation? Is it a duty resting upon them to immediately stop business and close up the affairs of the corporation? Surely, a doctrine like that would stand in the way of the development of almost any new enterprise. It is a familiar fact that in the early days of any manufacturing establishment, and before its business has become fully developed, the value of the plant is less than the amount-of money which it has cost, and if the directors cannot indemnify themselves for the continued use of their personal credit for the benefit of the corporation, many such.enterprises must stop in their very beginning.
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Mr. Justice Brewer,
after stating the case, delivered .the opinion of the court.
In the absence of any testimony, and in the manner in which this case was submitted for decision, it must be assumed that the matters alleged in the bill and not denied in the answer and the new matters set forth in the answer are true. And the question which arises is whether, upon these admitted facts, the decree in favor of the plaintiffs can be sustained.
' The manufacturing business in which the corporation was engaged was a new enterprise. It had been carried on for only about eighteen months. In that business ■ had • been invested nearly $300,000, and the property possessed by the corporation was at its cost price equal to the entire indebtedness. It thus appears that there . had been no waste, mismanagement, or loss. Not a dollar of the indebtedness was held by any director or stockholder, but the personal credit of the six directors and stockholders had been loaned to the company to the extent of $69,000. The corporation was still a going concern. There was no purpose of abandoning the business. ■ The indorsers believed that if the corporation could ■be tided over its temporary embarrassment it could be made successful. The stockholders authorized the mortgage. It was given only upon part of the property, and that part already encumbered by a fifty thousand dollar trust deed. The value of this property was, according to the subsequent appraisement, much below the sums secured by the trust deed and the mortgage. In addition the corporation had nearly $90,000 of unencumbered property to apply in satisfaction of the claims of its creditors. The mortgage was not given simply as security for a past indebtedness, but to induce- the
indorsers to obtain for the corporation a renewal or extension of its obligations, and to make further indorsements. In reliance upon this mortgage the indorsers secured renewals or extensions, or themselves took up the notes they had indorsed, and at the same time lent the credit of their names to new paper of the company. Thus they prevented a suspension of the business and enabled the corporation to continue its operations, and did so believing that by such continuance the corporation would be enabled to work itself out of its temporary difficulties. All this was done in the utmost good faith.
Under these circumstances, should the transaction be condemned and the mortgage held void as against creditors? This question, we think, must be answered in the negative. It is said that the directors of a corporation stand in a fiduciary relation to both the stockholders and the creditors. Whatever may be the extent of the fiduciary obligations of directors to stockholders, there can be no pretence in this case of a breach thereof. The mortgage was expressly authorized by the stockholders, and they cannot claim that the directors in executing the instrument, which they had themselves authorized, were guilty of any breach of duty to them. It is often said that the directors may not take advantage of their position and power to secure personal advantage to themselves, but that, proposition has no application here, for the corporation itself directed this mortgage. It was an application by the debtor' of its property to secure certain of its creditors, and not the act of the agents of a debtor to protect themselves. The case involves no breach of trust-on the part of the agent towards the principal, but more closely resembles the case of an individual debtor giving preferences to certain of his friends, and the genei’al rule is that, in the absence .of statute, a debtor has such
jus dispon endi
in respect to his property that, although insolvent and contemplating a cessation of business and the surrender of his property to his creditors, he may lawfully prefer certain of them, even though thereby others receive no payment.
But, passing from the relations of directors to the corpo
ration and its stockholders, it is one of the vexed questions of the law as to how far the duty of a corporation and its directors to creditors interferes with the otherwise conceded power of a debtor to prefer certain of his creditors. Into a discussion of this question in its length and breadth we deem it unnecessary now to enter, for the facts of this case remove many of the embarrassments that often attend such questions. This is not like the case of
Sutton Manufacturing Co.
v. Hutchinson, 63 Fed. Rep. 496, decided by the United States Court of Appeals for the Seventh Circuit, in which the directors of a corporation, insolvent and intending to discontinue business,.gave a mortgage to secure certain of their number who happened to be creditors, and thus attempted to secure a preference in behalf of themselves. Nor is it the case of the directors of a corporation in fact insolvent, though continuing and expecting to continue in business, executing a mortgage on the property of the corporation to simply secure themselves for a past indebtedness ; for here the corporation, although insolvent within the rule which declares that insolvency exists when a debtor has not property sufficient to pay Ids debts, was still a going concern and intending to continue its business, and the mortgage was executed not simply to secure directors and stockholders for past indebtedness but to induce them to procure a'renewal or extension of paper of the company then maturing or about to mature, and also to obtain further advances of credit.
Will it be doubted that, if this mortgage had been given directly to the holders of these notes, it would have been valid ? Are creditors who are neither stockholders nor directors, but strangers to a corporation, disabled from taking security from the corporation by reason of the fact that upon the paper they hold there is also the. indorsement of certain of the directors or stockholders? Must, as a matter of law, such creditors be content to share equally with the other creditors of the corporation, because, forsooth, they have also the guarantee of some of the directors or stockholders, whose guarantee may or may not be worth anything?
But’ even that is not this case, for here the corporation was
a going concern and intending to continue in business, and the mortgage was given with a view of enabling it to so continue, and to prevent creditors whose debts were maturing from invoking the aid of the courts to put a stop thereto. Can it be that, if at any given time in the history of a corporation engaged in business, the market value of its property is in fact less than the amount of its indebtedness, the directors, no matter what they believe as to such value, or what their expectations as to the success of the business, act at their own peril in taking to themselves indemnity for the further use of their credit in behalf of the corporation? Is it a duty resting upon them to immediately stop business and close up the affairs of the corporation? Surely, a doctrine like that would stand in the way of the development of almost any new enterprise. It is a familiar fact that in the early days of any manufacturing establishment, and before its business has become fully developed, the value of the plant is less than the amount-of money which it has cost, and if the directors cannot indemnify themselves for the continued use of their personal credit for the benefit of the corporation, many such.enterprises must stop in their very beginning.
It is worthy of note, too, that these directors placed the encumbrance not on the entire property of the corporation, but only upon that part which ordinarily shows the greatest difference between value and cost, to wit, the building and the machinery — property, too, which was already encumbered for a large sum, leaving free all the unencumbered property of the corporation to answer to the claims of creditors.
Of course, an underlying fact, expressly stated to have existed in these transactions, is good faith. Carrying on business after the giving of an indemnifying mortgage, with a knowledge of insolvency, with the expectation of soon winding up the affairs of the corporation, and only for the sake of giving an appearance of good faith, leaves the transaction precisely as though the mortgage was executed at the moment of distribution, and with the view of a personal preference.
Again, not only was the corporation a going concern, not only did the directors expect and intend that it should continue, and believe that its continuance would bring financial success, but, as appears, they did continue the business for -two months, and during that time paid out in the ordinary management of its affairs and in discharge of its debts over $30,000, without appropriating a single dollar to the payment of the claims for the indorsement of which they had taken this indemnity.
¥e are of opinion that these facts clearly and fully distinguish this case from many which have been cited, in which the action of the directors of a corporation in securing to themselves preferences in the hour of its extremities has been adjudged void, and that it is going too far to hold that a corporation may not give a mortgage to its directors who have lent their credit to it, to induce a continuance of the loan of that credit, and obtain renewals of maturing paper at a time when the corporation, though .not in fact possessed of assets equal to its indebtedness, is a going concern, and is intending and expecting to continue in business. ¥e are, therefore, of opinion' that the Circuit Court erred, and the decree will be
Reversed and the ease remanded for further proceedings not inconsistent with this opinion.