Dissenting Opinion.
Hadley, J.— It is conceded that this court has adopted the rule that a corporation, while prosecuting its corporate business, though with liabilities greater than assets, may prefer its creditors, as may a natural person, and that such preference may extend to an officer or director of the corporation when conferred by the vote of a disinterested majority of the board of directors. I am impressed, however, after a thoughtful consideration of the subject, that the rule has been already carried in this State as far as reason and judicial precedent will warrant, and, in so far as it is held in the majority opinion in the case at bar that the directors of an insolvent corporation, in contemplation of its early dissolution, may appropriate the entirp assets of the -corporation to the exclusive security of their own preexisting personal liabilities, I am unable to agree with my brethren, and am constrained to enter my earnest protest.
The holding is a step in advance of any previous ruling of this court, is forbidden by the decided weight of authority, as I shall endeavor to show, and invests corporation directors with such temptations and powers for mischief and moral wrong that, if no other reason existed, it should be denied on the ground of public policy. In support of this view I am not driven to what is commonly called the trust-fund doctrine, that is, to a line of decision to the effect that upon insolvency equity seizes the assets of a corporation for equal distribution to the creditors, — and no preference can *630be given to any one. This latter doctrine has been repudiated in this and in most other states of the Union to the extent of recognizing the right of insolvent corporations to prefer their common, unofficial creditors to the same extent, and by the same modes, that an insolvent individual may prefer his. But as to official or director creditors, it is quite as generally held that their position as managing agents gives them such an unequal and unfair advantage over other creditors that they will not be permitted by courts of chancery to profit by their superior knowledge and position in a race of diligence.
The position occupied by directors is one of trust, call it what we may. They receive the property of others, act for others, and are accountable to others. They are bound to devote the property entrusted to them exclusively to the purposes of the corporation. Any departure in this is a misappropriation for which they are answerable to the stockholders or the creditors. The assets not being their own, they hold and administer them primarily; for the benefit of the stockholders, secondarily, for the use of those who may by contract or operation of law succeed to the interests of the stockholders. While the corporation is'solvent, the active fiduciary relation is between the directors and the stockholders, who are the real parties in interest. When insolvency occurs the stockholders, while retaining the legal title, by force of law, part with all beneficial interest in the assets, and the same is transferred to the creditors. The possession and control of the directors being unchanged by the advent of insolvency they thereafter necessarily hold the property, not for themselves, but in trust for the creditors who now have the exclusive interest. It at once becomes their duty to apply the assets to the payment of the debts; not necessarily pro rala, because the creditors have no mutual relation among themselves; but they hold the assets in trust for application to the debts, either pro rata or preferentially, as they themselves deem the merits *631of the creditors to be. The directors, being the corporation for the purpose of judging among the creditors, can not select themselves from among the creditors for preference, because they can not be both judges and creditors at the same time. It seems absurd to say that the same persons may constitute different identities of themselves, so that, as directors of a corporation, they may convey, or mortgage, or contract, with themselves as private persons. The relation of debtor and creditor implies antagonism, — a countervailing interest of distinct and independent parties. The interests of self-preferring creditors are cooperative and the same. The more anxious as a creditor to obtain the preference, the more willing and ready as a debtor to grant it. This puts thé director in a situation wholly incompatible with his duty to serve all stockholders and creditors fairly and alike. • While not a trustee in a technical sense, there can be no doubt that he occupies such a fiduciary position towards the stockholders and creditors as calls for a faithful performance of duty, and conduct entirely free from any use of his position to advance his personal interests beyond those of others of equal merit. We have many American decisions in support of this view, from the more recent of which in the several states, though often not the best considered, I briefly quote: “It seems to be well settled that directors of- an insolvent corporation, who are creditors of the company, can not secure to themselves any preference or advantage over other creditors in the payment of their claims.” Bonney v. Tilley, 109 Cal. 346, 42 Pac. 439, quoted approvingly in Merced Bank v. Ivett, 127 Cal. 134, 59 Pac. 393, decided December 11, 1899. “It is not good morals, or good law.” Fishel v. Goddard (Col.), 69 Pac. 607, 612. (July 5, 1902.) “We think it very clear, therefore, that when the validity of these mortgages, to secure debts upon which the directors were ■ indorsers, was questioned by other creditors of the corporation, they should have been classed as instruments rendered void by the legal *632principle which prevents directors of an insolvent corporation from giving themselves a preference over ontside cred-" itors.” Atlas Tack Co. v. Exchange Bank, 111 Ga. 703 710, 36 S. E. 939. (August 7, 1900.) “The law is, however, that- an insolvent corporation can not prefer a creditor who at the time is a director therein.” Rockford, etc., Co. v. Standard, etc., Co., 175 Ill. 89, 51 N. E. 642, 67 Am. St. 205. (October 24, 1898.)
“ In Hays v. Citizens Bank, 51 Kan. 535, 33 Pac. 318, it was held that the directors and managers of a corporation, who were creditors of the same, could not prefer themselves, leaving the question undecided as to whether other creditors might be preferred. The ground of that decision is that the directors are the agents of the stockholders and creditors, and that their interests as creditors would be inimical to their duties as agents. They occupy a fiduciary relation to the creditors and stockholders and may not take advantage of their superior information and opportunity to gain an advantage over those whose interests they are guarding; nor are they permitted to contract with themselves as they may with third parties.” Grand, etc., Co. v. Rude Bros. Mfg. Co., 60 Kan. 145, 150, 55 Pac. 848. (1899.) “Officers of a corporation, who are also its creditors, can not lawfully pay their own claims in preference to other creditors, when the corporation is insolvent.” IIead*note 2, James Clark Co. v. Colton, 91 Md. 195, 46 Atl. 386, 49 L. R. A. 698. (1900.)
“The directors of an insolvent corporation, being its creditors, can not take advantage ‘of their fiduciary'relation, and deal directly with themselves, to the injury of others in equal right. If they do, equity will set aside the transaction, at the suit of creditors of the corporation or 'their representatives, without reference to the question of any actual fraudulent intent on the part of the directors; for the right of the creditors does not depend upon fraud in fact but upon the violation of the fiduciary relation of the directors.’ ” *633Taylor v. Fanning (Minn.), 91 N. W. 269. (July 3, 1902.)
“At common law a debtor may prefer a creditor to the exclusion of others — but a different rule prevails when the creditor is a director of an insolvent corporation debtor. The directors in such Case are not strictly trustees for the general creditors, though sometimes so called, — but they owe them a duty, which is inconsistent with the taking of a security for prior indebtedness to their detriment.” Symonds v. Lewis, 94 Me. 501, 48 Atl. 121. (1901.)
“The corporation was plainly insolvent, not a going concern, nor one with any prospect of going on at any time in the future. It could not in such condition prefer its directors, secretary and treasurer.” King v. Wooldridge, 78 Miss. 179, 28 South. 824. (October, 1900.) “The proposition that an insolvent corporation can not prefer a debt on which its officers and directors are bound as sureties is now thoroughly established in this state.” Williams v. Turner (Neb.), 88 N. W. 668. (January 8, 1902.) “The law will not allow the stockholders and officers of the corporation to take advantage of their knowledge of the insolvent condition of the concern, and their power to use and control the assets, to pay their own debts, or to relieve them from special liabilities to the injury of other creditors. Graham v. Carr, 130 N. C. 271, 41 S. E. 379. (May 6, 1902.)
“The law applicable to these cases is extremely clear. While directors of corporations are not trustees in a technical sense, there is yet no doubt that they occupy a fiduciary position towards stockholders and creditors of the corporation, and that they come within the designation of persons filling a fiduciary relationship. In fact, they hold a position of the highest trust, and will therefore be required to execute it with the utmost fidelity. This being so, it is plain that the defendants could not use their official position to advance their individual interests. But this is precisely what they did, that is, with actual knowledge that the *634corporation was insolvent.” Smith v. Putnam, 61 N. H. 632. (1882.)
“The receiver of an insolvent corporation may recover its assets withdrawn after it has become insolvent in order to secure some of its directors against a liability incurred for the corporation. A preference of that character can not stand, although at the time it is given there is no statutory prohibition against it.” Head note, Taylor v. Gray, 59 N. J. Eq. 621, 44 Atl. 668. (November 22, 1899.)
“It is the settled law of this commonwealth, 'that an insolvent' debtor, whether corporation or individual, may prefer bona fide creditors; but if the creditor benefited be a director or other officer possessed of corporate power and corporate knowledge of the insolvency of his corporation, then he has an advantage over other creditors whose claims may be of equal m'erit; he has knowledge that his debt is in peril, and has the power to prefer himself. As he is in a sense trustee for all the stockholders and creditors, equity forbids that he should act solely for 'himself, regardless of the interests of those for whom he is trustee.” Mueller v. Monongahela, etc., Co., 183 Pa. St. 450, 458, 38 Atl. 1909. (1898.)
“The directors of an insolvent corporation are by virtue of their position debarred from preferring debts of the corporation due to themselves.” Head note, Olney v. Conanicut Land Co., 16 R. I. 597, 18 Atl. 181, 5 L. R. A. 361, 27 Am. St. 767. (August 10, 1889.)
“When a corporation is insolvent and has ceased to be a going concern, and its officers know, or ought to know, that suspension is impending, then such officers are so far trustees that they may not transfer corporate property to themselves in payment of debts due them, and that such a transfer constitutes a fraud in law.” Slack v. Northwestern Nat Bank, 103 Wis. 57, 64, 79 N. W. 51, 74 Am. St. 841. (April 25, 1899.) Of same import, see Burnham, etc. Co. v. McGomick, 18 Utah 42, 55 Pac. 77. (October 22, 1898.) To the same effect, see Harding v. *635Hart, 51 C. C. A. 264, 113 Fed. 304, 342. (January 7, 1902.) Kittel v. Augusta, etc., R. Co., 78 Fed. 855. (February 22, 1897.) Northwestern, etc., Ins. Co. v. Cotton, etc., Co., 70 Fed. 155. (October 21, 1895.) Bosworth v. Jacksonville Nat. Bank, 12 C. C. A. 331, 64 Fed. 615. (November 27, 1894.) Sutton Mfg. Co. v. Hutchinson, 11 C. C. A. 320, 63 Fed. 496. (October 1, 1894.) Consolidated, etc., Co. v. Kansas City, etc., Co., 43 Fed. 204. (September 5, 1890.)
It is not clear how Sanford, etc., Co. v. Howe, etc., Co., 157 U. S. 312, 15 Sup. Ct. 621, 39 L. Ed. 713, lends any support to the proposition that directors, or a majority of the board of directors, may prefer themselves by appropriating all the corporate assets on preexisting liabilities, after they have determined that the corporation is hopelessly insolvent, and will in a few days abandon its corporate business. In that case Justice Brewer rests the court’s ruling upon the fact that the stockholders expressly, by vote, authorized the mortgage, and that at the time it was executed the corporation was a going concern, and intended to continue in business, and in fact did continue, and paid out $30,000 on its obligations, other than those secured, in the usual course of business; and it was also at the time believed by all parties to be solvent, and was in fact solvent if the assets were worth as much as they cost. The trend of the decision is indicated by the following sentence, at page 317: “It is often said that 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.” To the same effect, see, also, the following text-writers: Cook, Corp. (4th ed.), §692; Elliott, Priv. Corp. (3d ed.), §189; Field, Corp., §174; Rees, Ultra Vires, §155; Spelling, Priv. Corp., §713; Taylor, Priv. Corp. (4th ed.), §759; Thompson, Corp., §§6503, 8496; Morawetz, Priv. *636Corp. (4th ed.), §787; Clark & Marshall, Priv. Corp., 2414.
Arkansas, Ohio, Massachusetts, Dew York, and a number of other states, have statutes restricting the right of insolvents to prefer any creditor. Tennessee, Texas, Washington, South Dakota, and perhaps some other states, seem to adhere to the trust-fund doctrine.
It has always been the rule that the holder of a secret equity shall not assert it to the injury of one who has been innocently misled thereby, and in what way is the principle different, when the directing agents of an insolvent corporation, with that full knowledge of the financial condition of the concern the law requires them to have, continue to conduct the business, keep the public records fair, invite public confidence, solicit the people to deal with them, and thus go on under cover, speculating on the capital fund of the association, until it has been wasted to a point that will only secure their personal liabilities, then, under claim of acting for the corporation, deliver to themselves, as creditors, all that is left of the assets ? I am mistaken if the deception of the one is not as culpable as the other, and if the conduct of the latter does not violate the principles of common honesty.