the deed of trust. In the same class were two notes by the corporation to James Walsh as administrator of the Conrad estate.

It was not shown by the evidence that the creditor, James Walsh, was the same person as James Walsh, the president and director of the corporation, nor was any evidence offered explanatory of the assumption by the corporation of the note of James Walsh & Co. The case was argued by counsel on both sides and the identity of James Walsh in each capacity has been assumed. No evidence was offered tending to prove actual bad faith, either in the execution of the deed or in creating the debts secured by it.

The court found that on the eighteenth day of March, 1893 (the date of the deed of trust), the defendant, James Walsh Mercantile Co., was insolvent, and from that date "ceased to be a going concern." Upon this finding a decree was entered setting aside the deed of trust, from which defendants appealed.

Most of the questions involved in this record have, in some recent cases in this court, been given careful and exhaustive consideration. The investigations given the subject have been more labored and thorough on account of apparent want of harmony. in some of the previous decisions of this court, as well as an account of the diversity of opinion in other jurisdictions. The conclusion reached by each of the divisions, which received the concurrence of all the members, may be briefly given in the language of the syllabi, prepared by the judge who wrote one of the opinions, as follows:

*

* prefer

"A corporation in failing circumstances may one creditor to another in discharging its obligations, if such preference is made in good faith while the property of the company remains in its possession unaffected by liens or by process of law.

*

** Mere insolvency of a corporation does not of itself transform its assets into a trust fund for the equal benefit of all its creditors." Alberger v. Bank, 123 Mo. 313; Slavens v. Cook Drug Co., 128 Mo. 341; Waggoner-Gates Milling Co. v. Commission Co., 128 Mo. 473.

In the case last cited, which was decided by division two of this court, it was also held that preference in the same circumstances may be given to a creditor of a corporation who is secured by the endorsement of some of its directors.

It would seem to follow logically from these decisions that a preference may be made to a director for a debt directly due him from the corporation, unless it would be defeated by his own act in voting himself the preference.

But it is insisted with much earnestness and argued with great ability that the directors had no power to bind the corporation to an agreement made with themselves, and in which they had a personal interest, and that, therefore, the resolution of the board of directors authorizing preferences to be given the members thereof over other creditors, and the deed of trust executed in pursuance thereof, were absolutely void.

This contention must rest upon one or two theories—either that the directors of a corporation are trustees for its creditors, and its assets constitute a trust fund which they must apply ratably toward the satisfaction of all the debts, or that such a transaction is, upon its face, constructively fraudulent.

As has been said, the so-called trust-fund theory, as applied to a corporation while dominion over its property is retained, is not recognized in this state as being sound. Nothing additional need be said on that subject.

The board of directors are undoubtedly trustees for the corporation and stockholders, and when acting for them are bound to exercise the utmost good faith. Any attempt in dealing with its property or affairs to secure themselves personal advantages over other stockholders should at least be subject to the most rigorous scrutiny. Hill v. Rich Hill, etc., Co., 119 Mo. 9, and cases cited.

But it cannot be said as a correct proposition of law that officers of a corporation cannot themselves and in their own names contract with it. To so hold would virtually deny to corporations the credit upon which so much of the business of the country is transacted and which is so essential to success. If the stockholders and officers of corporations are not permitted to advance money to them or to endorse for them without subjecting themselves to such disadvantages, they would be deprived of their most valuable source of credit. A corporation naturally looks to those. interested in its affairs for accommodations. If directors can lend the corporation money or endorse for it, they should certainly have the same right to collect the debts or secure themselves as is accorded to other creditors.

The cases cited abundantly show that a corporation, so long as it has control of its property, though insolvent, may, when acting honestly, prefer one creditor to another. A mortgage, then, giving such preference is not constructively fraudulent. Neither the corporation nor the other stockholders are injured by the preference given. To defeat them actual fraud should be shown. The honest debts all stand and should stand on equal footing. All

the creditors should have equal rights to enter in the race of diligence. The fact that the race may be unequal should not deprive the winner of his reward. An individual debtor can prefer his family, his neighbors, and his friends. If the preferred debt is honest, the preference cannot be impeached, though the wife of the debtor secure the advantage. Hart v. Leete, 104 Mo. 338; Riley v. Vaughan, 116 Mo. 176. No reason can be seen why a corporation may not also prefer its friends. There is no more equity in allowing an individual debtor to prefer his creditor wife or children than in allowing a corporation to prefer its stockholders and officers. To permit equities to control would defeat all preferences.

While the owner of property retains the power of its disposal, he may apply it to the payment of any honest debt, is the rule upon which the right to make preferences among creditors rests. The rule should apply as well to corporations as to individuals, and any change should be made by the legislature and not by the courts. If the debt is an honest one, and the corporation had the power to contract it, it has the right to pay or secure it, and no fraud can be imputed to it from the fact that it is paid or secured in preference to another.

"It may be conceded," said Taft, J., in a recent case, "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. Furniture Co., 58 Fed. Rep. loc. cit. 292. See, also, Warthen v. Griffith, 28 S. W. Rep. (Ark.) 286, and cases cited.

We do not think, therefore, that the deed of trust is constructively fraudulent for the reason that it gives preferences to a director of the corporation. When the right of the corporation to give preferences to any of its creditors is conceded, the logical conclusion follows that it can give them to any creditor who holds an honest debt against it, though he be an officer or stockholder.

This conclusion is in accord with the declaration of Sherwood, J., in a recent case. He says: "A corporation, within the scope of the purposes for which it was incorporated, may do any act in

furtherance of those purposes which an individual in similar circumstances might do, and, though insolvent, may prefer some creditor to others, even though such creditors are among the directors of the corporation." Foster v. Planing Mill Co., 92 Mo. 87. While the directors of a corporation do not sustain the strict relation of trustees for its creditors, yet their duties to them and their relation to the corporation itself are such as impose upon them some of the obligations of trustees. In dealing with the corporation they deal with themselves. They determine the liability of the corporation to themselves. They should, therefore, be required, in case they give themselves a preference over other creditors, to show that all their secured debts are fair, honest, and justly due them. This burden properly rests upon them.

From this record it appears that the invalidity of the deed of trust in question was declared to result from the mere insolvency of the corporation at the time it was executed. The question of the bona fides of the debts of the directors, who were given preferences, was not gone into on the trial. The act of the directors in voting themselves preferences would make the deed of trust prima facie fraudulent in fact, but not conclusively so as a matter of law. The court evidently did not decide the case upon the presumption of fact that the deed was fraudulent, which it might have indulged. We, therefore, reverse the judgment and remand the cause for a new trial.

BRACE, P. J.; BARCLAY and ROBINSON, JJ., concur.

(c) What Property Subject to Execution.

THE PLYMOUTH RAILROAD Co. v. COLWELL AND JACOBY.

39 Pennsylvania State Reports 337 (1861).

ERROR to the Common Pleas of Montgomery County.

This was an action of ejectment, brought May 12, 1858, by the Plymouth Railroad Co. against Stephen Colwell and Susanna Jacoby, for a lot of ground in the borough of Conshohocken (formerly Plymouth township), in the county of Montgomery, "containing about two acres of land, or thereabouts."

The case was tried on the issue formed by the usual plea of not guilty," and resulted in a verdict and judgment for defendants; whereupon the plaintiff sued out this writ.

There were a number of errors assigned by the plaintiff in error, founded chiefly on bills of exception to the admission or rejection

of evidence, none of which was considered material, except the ninth.

WOODWARD, J. It was demonstrated on the argument, from the descriptions in title papers and from a draft of the premises, that the land for which Colwell took defense was not within the description of the plaintiff's writ. Of course they were not entitled to recover that for which they had not sued, and the verdict and judgment as to Colwell are unimpeachable.

But the defense of Mrs. Jacoby, as to her part of the premises, rests on another footing. To explicate it clearly from the confusion of an ill-arranged paper-book, the leading facts of the case must be grouped together.

66

By an act of Assembly of March 18, 1836, the plaintiffs were incorporated as a railroad company, to build a railroad apparently for the purpose of connecting the lime-kilns and farms of the interior of Montgomery county with the Philadelphia, Germantown & Norristown Railroad. In April, 1837, they bought a farm of Aaron Lukens, of forty acres and 104 perches, through which their road was to pass. They built a cheap railroad three and three-quarters miles long, suitable only for horsepower, and have maintained it as such ever since. In 1841 they sold off to John Freedly and others, thirty-eight acres and 130 perches of the Lukens farm, retaining only one acre and 134 perches- the premises now in dispute. In 1844 this retained lot was sold at sheriff's sale, on a judgment of Joseph Leedon against the company - the sale was set aside - and it was sold again on the same judgment to John Freedly for $950. The last levy and sale described the premises as two acres more or less, on a part of which is the Plymouth Basin, and the Plymouth Railroad passes across said lot, subject to the corporate franchises of the said Plymouth Railroad Co. over a part of said lot if any they have." Exceptions were filed to said sale on behalf of the company, on the ground that the premises were expressly reserved to the company for railroad purposes, and that they included the basin and grounds on which the road is located, and which are indispensable appurtenances of the road. The court overruled the exceptions, and confirmed the sale. On the 26th of November, 1849, Freedly conveyed part of the premises to Colwell, and after Freedly's death, his executors, in 1853, conveyed the residue to Susanna Jacoby. The company claim the basin as a means of communicating with the Schuylkill canal. It would seem there was a basin on the Lukens farm before the company bought, and that it was used as a deposit for logs to supply an adjacent sawmill. After their purchase the company deepened the basin so as