As the rule is firmly established in this state that a corporation, even though insolvent, may make preferences among its creditors, it is evident that it cannot be said that the property of a corporation in this state is a trust fund in the hands of its directors, in the strict and technical sense of such words. There may be a qualified meaning in which, at times, the assets of a corporation may properly be termed a trust fund, and this may be well illustrated by reference to certain opinions of the supreme court of the United States, in which the question has been considered. In the case of Graham v. Railroad Co., 102 U. S. 148, Mr. Justice Bradley, after referring to the contention that the corporation was a mere trustee holding its property for the benefit of its stockholders and creditors, said: "We do not concur in this view. It is at war with the notions which we derive from the English law with regard to the nature of corporate bodies. A corporation is a distinct entity. Its affairs are necessarily managed by officers and agents, it is true; but, in law, it is as distinct a being as an individual is, and is entitled to hold property (if not contrary to its charter) as absolutely as an individual can hold it. Its estate is the same, its interest is the same, its possession is the same." The learned judge then proceeds to say that, when a corporation becomes insolvent, a court of 577 equity may, at the instance of the proper parties, take charge of its assets, and administer them as a trust fund for the benefit of its stockholders and creditors. "The court," he says, "will then make those funds trust funds which, in other circumstances, are as much the absolute property of the corporation as any man's property is his." In other words, as we understand that opinion, until a court, through its officers, takes charge of the property of the corporation, it has, even though insolvent, as complete control thereof as an individual would have over his property under like circumstances. In the late case of Hollins v. Brierfield Coal & Iron Co., 150 U. S. 385, Mr. Justice Brewer, reviewing the cases on this question, illustrates the sense in which the term "trust fund" has been used by the court in speaking of the assets of a corporation. "The same idea of equitable lien and trust," he says, "exists to some extent in the case of partnership property. Whenever, a partnership becoming insolvent, a court of equity takes possession of its property, it recognizes the fact that in equity the partnership creditors have a right to payment out of those funds in preference to

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individual creditors, as well as superior to any claims of the partners themselves. And the partnership property is, therefore, sometimes said, not inaptly, to be held in trust for the partnership creditors, or that they have an equitable lien on such property. Yet all that is meant by such expressions is the existence of an equitable right which will be enforced whenever a court of equity, at the instance of a proper party, and in a proper proceeding, has taken possession of the assets. It is never understood that there is a specific lien or direct trust." It is only in this limited and qualified sense that the assets of an insolvent corporation may in this state be properly said to be a trust fund for its creditors, for our 578 decisions that such a corporation may make preferences among its creditors is inconsistent with the idea of any specific lien or direct trust.

But it is contended that the funds of an insolvent corporation are in the hands of the directors to be disbursed on their unbiased and impartial judgment, and that, when personal interest or individual gain is an element subserved through their preference, it should be set aside as being in contravention of sound equitable principles. To support this contention counsel cite, among other cases, the well-considered case of Mallory v. Mallory-Wheeler Co., 61 Conn. 131. In that case the directors of a corporation undertook to use their official position for their own benefit, and to increase their salary, to the injury of the interests of the corporation. The familiar rule that no one acting in a fiduciary capacity shall be permitted to make use of that relation for his own benefit, at the expense of the interests of his principal, was invoked by the corporation, and applied by the court. There can be no doubt that the rule was properly applied in that case, for the directors are agents, and, to a certain extent, trustees of the corporation. They will not be allowed to enter into engagements in which they have a personal interest conflicting with the interests of their principal, whose interests they are bound to protect. The rule is of wide application, and applies, as was held in that case, to agents, partners, guardians, executors, and to trustees generally, as well as to the directors and managing officers of corporations. If personal engagements hostile to the interest of their principals are entered into by persons holding such fiduciary relations they are not, in law, absolutely void, but voidable at the election. of their principals. We do not see how that rule can apply

in this case, for the party complaining here is not the corporation, but certain creditors of the 579 corporation. The directors of a corporation are neither trustees nor agents of the creditors, and they do not occupy a fiduciary relation toward them, and therefore the rule does not apply.

Although there are expressions in many of the cases cited by counsel that seem to support the contention that, even when an insolvent corporation may make preferences, the directors of such corporation must be free from personal bias in disbursing its assets and making such preferences, yet we do not believe that such a rule has any sound reason to rest upon. The very fact that preferences are made shows always that the party making them is biased more or less toward the person in whose favor they are made. As long as preferences are allowed to be made by insolvent debtors they will be dictated more or less by the personal bias of the person making them. The individual debtor, when insolvent and forced to make an assignment, generally prefers his friends, and often members of his own family. The home creditor and neighbor is preferred at the expense of the nonresident one, perhaps equally deserving. So, when this dry goods company came to make an assignment, it is not strange that, in making preferences, it should favor the home creditors. The contention that the estate of an insolvent debtor should be disbursed by some one acting without bias or personal interest would apply almost as well to the case of an assignment by an insolvent individual or partnership, as to that of a corporation, and, if adopted, would result in forbidding all preferences in assignments by insolvent debtors, a result that must be productive of much good, but it is one that the courts might leave to the wisdom of the legislature to accomplish; for, to quote the language of Judge Caldwell, in Gould v. Little Rock etc. Ry. Co., 52 Fed. Rep. 684, the right to make preferences "is too firmly imbedded in our system of jurisprudence to be overthrown by judicial decision, and it can 580 no more be overthrown by the courts in its application to corporations than to individuals": Gould v. Little Rock etc. Ry. Co., 52 Fed. Rep. 684. That was a case that arose in this state, and was controlled by the laws of this state, and, after an examination of the authorities, the court held that an insolvent corporation of this state may prefer its creditors, whether they be officers of the corporation or strangers. "The doctrine established by the best-consid

ered cases, and by the supreme court of the United States," says Judge Caldwell, in his opinion in that case, "is that the mere fact that creditors of a corporation are directors and stockholders does not prevent their taking security to themselves as individuals to secure a bona fide loan of money previously made to such corporation, and used by it in conducting its legitimate business." The same question came in a recent case before the United States circuit court of appeals for the sixth circuit, and the same conclusion was reached. "It may be conceded," said Judge Taft, who delivered the opin ion of the court, "that the trust relation justifies and requires courts of equity to subject preferences by an insolvent corporation of its own directors to the closest scrutiny, and places the burden upon the preferred director of showing, beyond question, that he had a bona fide debt against the corporation; but we do not see why, if a corporation may prefer one creditor over others, it may not prefer a director who is a bona fide creditor. Preferences are not based on any equitable principle. They go by favor, and as an individual may prefer, among his creditors, his friends and relatives, so a corporation may prefer its friends": Brown v. Grand Rapids etc. Co., 58 Fed. Rep. 286. The following cases sustain this position: Buell v. Buckingham, 16 Iowa, 284; 85 Am. Dec. 516; Garrett v. Burlington Plow Co., 70 Iowa, 697; 59 Am. Rep. 461; Bank of Montreal v. Potts Salt and Lumber Co., 90 Mich. 345; Hospes v. Northwestern Mfg. Co., 48 Minn. 174; 31 Am. St. Rep. 637; 581 Planters' Bank v. Whittle, 78 Va. 739; Hallam v. Indianola Hotel Co., 56 Iowa, 179; Smith . v. Skeary, 47 Conn. 47; Wilkinson v. Bauerle, 41 N. J. Eq. 635; Whitwell v. Warner, 20 Vt. 425; Duncomb v. New York etc. R. R. Co., 84 N. Y. 190.

The supreme court of Iowa, in Garrett v. Burlington Plow Co., 70 Iowa, 697, 59 Am. Rep. 461, after discussing at some length the question whether an insolvent corporation can prefer a debt due one of its directors, and deciding that it may do so, then considers the exact question involved in this case, that is, whether such a corporation may prefer a note to a person having no connection with the corporation, but upon which note a director is indorser, and disposes of it in the following words: "The note held by the savings bank presents a different and less difficult question. It was not given to a director or member of the corporation. Rand and other directors are indorsers or guarantors of the note. We

know of no principle of law which will compel the bank to proceed against the indorsers or guarantors, and surrender the property it holds to other creditors."

A corporation will not, any more than an individual, be allowed to convey its property to defraud its creditors, but in the case at bar the evidence is conclusive that the debt due Worthen & Co. was an honest and bona fide debt for a large sum of money, which they in good faith loaned the dry goods company. They had no interest in or connection with the dry goods company, either as stockholders or directors. They had a perfect right to make the loan, and it was entirely legitimate for a director to indorse the notes as a personal guaranty that the money should be repaid. As the proof shows that F. P. Gray, who was the indorser on two of the notes for three thousand dollars each, was insolvent, and that James A. Gray, who was the indorser on another one of the notes for five thousand dollars, had but little property in this state, it is plain that, in 582 making the loan, Worthen & Co. relied mainly on the faith and credit of the dry goods company. In other words, they expected to be paid by the dry goods company and not by the indorsers.

While there is not wanting eminent authority to support the decree of the learned chancellor in this case, yet, after a consideration of the above authorities, and also of the cases cited by counsel for appellee, we have reached the conclusion that, the dry goods company having the right to make preferences, and Worthen & Co. having advanced it in good faith over twenty thousand dollars to be used in its business, that the fact that two of the directors were indorsers on notes for a portion of this sum did not, under the laws of this state, render the assignment preferring the debt due Worthen & Co. invalid.

Had we reached a different conclusion it is doubtful if the equitable principle of equality could in this case have been applied in the distribution of the proceeds of the assets of the insolvent corporation. Such a conclusion, under the former adjudications of this court, would probably only have resulted in giving priority to a different set of creditors, not more meritorious or deserving than those preferred by the assignment. Many eminent text-writers have severely condemned a state of law that admits of preferences by insolvent corporations, but their reproaches, in the language of counsel, "must fall on the legislative, not on the judicial.