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FAULKNER v. LOWELL TRUST CO
Summary of Opinion: LUTHER W. FAULKNER et al. v. LOWELL TRUST COMPANY et al.
Factual and Procedural Background
On May 1, 1928, the Lowell Chamber of Commerce, the Appleton National Bank of Lowell as "trustee," and various persons (subscribers), signed a sealed agreement to promote industrial financing in Lowell. Each subscriber agreed to pay on demand assessments to the trustee up to a prescribed limit, and the trustee agreed to furnish participation certificates to any of five named banks making industrial loans with the approval of the Board of Industrial Fund Directors (the Board). The Board was to have ten members: five appointed by the Chamber of Commerce and five appointed by the five named banks (one each). The agreement provided that "all votes recommending loans shall require at least seven (7) affirmative votes in order to be binding."
On October 16, 1928, the Lowell Trust Company (one of the five banks) made a loan to the Model Shoe Company, Inc., and the trustee issued a participation certificate; the loan was renewed several times. On April 26, 1931, the Board voted to grant a participation certificate for a renewal when only seven members were present; the vote was unanimous. One of the seven voters was George M. Harrigan, president and a director of the Lowell Trust Company and its agent in making and renewing the loan.
After the Lowell Trust Company was closed and liquidated under order of the commissioner of banks (Dec. 16, 1931), the unpaid loan (then $12,500 plus interest) remained outstanding. On July 22, 1932 the Lowell Trust Company demanded that the trustee levy an assessment on the subscribers to cover the loss; the trustee threatened to do so. The plaintiffs (subscribers) filed a bill in equity on October 24, 1932 seeking to restrain any assessment and to cancel the participation certificate. The Superior Court entered a final decree granting the relief sought on the commissioner of banks' counterclaim by ordering an assessment on the subscribers; the plaintiffs' bill was implicitly dismissed. The plaintiffs appealed.
Legal Issues Presented
- Whether the Board's vote authorizing issuance of the participation certificate was invalid because one of the seven affirmative votes was cast by an officer (George M. Harrigan) of the lending bank, creating an alleged conflict of interest.
- Whether, as a consequence of the vote's validity or invalidity, the trustee may levy an assessment on the subscribers to make good the lender's loss.
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Copeland v. Mercantile Ins. Co. 6 Pick. 198, 203 | Cited in connection with how acts of interested agents/ fiduciaries may be invalidated. | Cited as an authority on the general principle, but the court stated it was unnecessary to decide the broader question here. |
| New-York Central Ins. Co. v. National Protection Ins. Co. 14 N.Y. 85 | Cited regarding invalidation of acts where interest exists. | Included among authorities illustrating the general rule on interested fiduciaries; court did not decide the general rule. |
| Ferguson Fries v. Gooch, 94 Va. 1 (agents) | Authority on agents' acts when interest exists. | Cited as illustrative of precedent about interested agents, but not dispositive here. |
| Flint v. Codman, 247 Mass. 463, 471 (partners) | Authority concerning partners and conflicts of interest. | Cited as an example in the survey of authorities; the court declined to resolve the broader rule. |
| Hayes v. Hall, 188 Mass. 510 (trustees) | Authority concerning trustees and conflicts of interest. | Cited as an authority on trustees' duties where interest may exist; the court did not decide the general proposition. |
| Lazenby v. Henderson, 241 Mass. 177 | Authority on fiduciary conflicts (as cited). | Cited among related authorities; not further relied upon to decide the case. |
| Guay v. Holland System Hull Co. 244 Mass. 240 | Authority on conflicts involving fiduciaries. | Cited in the court's survey of cases; the court did not rest its decision on resolving that general issue. |
| Beaudette v. Graham, 267 Mass. 7 (directors) | Authority concerning directors and conflicts of interest. | Cited as illustrative of principles applicable to directors; the court noted it need not decide the broader question. |
| Crowell Thurlow Steamship Co. v. Crowell, 280 Mass. 343, 361 | Authority on fiduciary duties and conflicts. | Included in the list of authorities relating to interested fiduciaries; not decisive here. |
| Geddes v. Anaconda Copper Mining Co. 254 U.S. 590, 599 | Federal authority on corporate fiduciary conflicts. | Cited to show related federal authority; the court did not apply a broad rule from it. |
| Irving Bank-Columbia Trust Co. v. Stoddard, 292 Fed. Rep. 815 | Federal case cited concerning interested fiduciaries/interlocking interests. | Listed among authorities on the subject; not treated as determinative. |
| Hellier v. Baush Machine Tool Co. 21 Fed. Rep. 2d 705 (interlocking directors) | Authority on interlocking-director situations and conflicts. | Cited as another instance of authority about conflicts of interest among fiduciaries; court did not base its holding on it. |
| Goodwin v. Agassiz, 283 Mass. 358 | Authority noting that directors in relation to stockholders are not held to full measure of fiduciary duty. | Cited to indicate limits on fiduciary duty in director-stockholder relations; used to contrast full fiduciary rules. |
| Bell v. Fred T. Ley Co. Inc. 278 Mass. 60, 75 | Authority that stockholders in relation to the corporation are not held to full fiduciary duty. | Cited for the proposition limiting fiduciary obligations of stockholders; used illustratively. |
| United States Steel Corp. v. Hodge, 64 N.J. Eq. 807, 813 | Authority on limits of fiduciary duties of stockholders/corporate actors. | Cited as further authority showing that some corporate relationships are not held to the full measure of fiduciary duty. |
Court's Reasoning and Analysis
The court first observed that it was unnecessary to resolve the broad question of how far acts of interested agents, trustees, or corporate directors are invalidated by their interest, and surveyed authorities on that general subject.
The court then turned to the controlling contract and its structure. The agreement required that all ten board members be subscribers, which meant every board member had a direct interest in restricting issuance of participation certificates (to avoid assessments). Five members were appointed by the Chamber of Commerce and had only their community interest; each of the other five was appointed by a bank and was also required to be a subscriber. The court concluded that, given the membership design, a bank-appointed member reasonably was expected at least in part to represent and protect that bank's interests.
Because the membership intentionally balanced conflicting interests (five chamber-appointed members and five bank-appointed members), the court reasoned that no member was genuinely impartial and that a requirement of seven impartial votes would have been impossible and was not contemplated by the agreement. The contractual requirement of "at least seven (7) affirmative votes" was to be understood as necessitating action by a substantial majority of interested persons rather than seven impartial voters. Applying that understanding to the facts, the court held that George M. Harrigan's vote (though he was president and agent of the lending bank) properly counted as one of the seven affirmative votes approving the participation certificate.
Holding and Implications
Holding: The decree of the Superior Court was affirmed. The court held that the agreement contemplated a balancing of conflicting interests among Board members and action by a substantial majority of interested persons, and therefore the Board's vote (including the vote of the bank officer Harrigan) was valid. The judgment below (ordering an assessment on the subscribers) was thus affirmed. The court awarded costs to the appellees.
Implications: The direct consequence is that the participation certificate issued upon the Board's April 26, 1931 vote was valid and the trustee may levy the assessment ordered by the Superior Court against the subscribers. The opinion expressly refrains from announcing a broad rule about the invalidity of actions by interested agents, trustees, or directors beyond the contractual context before the court; no sweeping new precedent on fiduciary invalidation was established.
Contract, Construction. Agency, Fidelity.
The chamber of commerce of a city, a national bank as trustee, and several individuals as subscribers, to further the industrial progress of the city, executed an agreement under seal, under which each subscriber agreed to pay on demand to the trustee such sums as might be assessed upon him by the trustee, and the trustee agreed to furnish to any one of five named banks, including the trustee, upon its making an industrial loan with the approval of a board composed of five subscribers chosen by the chamber of commerce and five other subscribers of whom each bank chose one, a certificate of participation in the obligations of the subscribers and in the additional security for the loan thereby afforded. It also was provided that votes of the board recommending loans required "at least seven affirmative votes in order to be binding." At a meeting of the board when only seven were present, a unanimous vote approved a loan by a bank whose president was one of the seven so voting; and the trustee issued a participation certificate. The subscribers later being threatened with an assessment by reason of the failure of the borrower to pay the loan, a subscriber sought to avoid liability for such assessment on the ground that the vote authorizing the issuance of the certificate of participation was invalid because an officer of the lending bank had cast one of the seven required affirmative votes. From a decree in effect declaring the vote valid, the plaintiff appealed. Held, that (1) The agreement contemplated a balancing of conflicting interests in the membership of the board and action by a substantial majority of interested persons; seven impartial votes were not required; (2) The vote was valid.
LUMMUS, J.
In order to aid in the financing of industries in Lowell and thereby to further the industrial progress of that city, an agreement was made on May 1, 1928, and signed by the Lowell Chamber of Commerce, the Appleton National Bank of Lowell, as "trustee," and various persons, including the plaintiffs, as "subscribers." Each subscriber agreed under seal to pay on demand to the trustee such sums as might be assessed upon him by the trustee, not exceeding in all a specified limit. The trustee agreed to furnish to any of five banks, including the trustee, making an industrial loan with the approval of the Board of Industrial Fund Directors, a certificate of participation in the obligations of the subscribers and in the additional security thereby afforded. The Chamber of Commerce was charged with the duty of appointing from the body of subscribers five of the ten members of the Board of Industrial Fund Directors, while each of the five banks named was to appoint one member, who was also required to be a subscriber. It was provided that "all votes recommending loans shall require at least seven (7) affirmative votes in order to be binding." The active business to be done under the agreement was to end on May 1, 1931.
On or about October 16, 1928, a loan of $25,000 was made to the Model Shoe Company, Inc., by the defendant Lowell Trust Company, one of the five banks named in the agreement, and the trustee issued to that bank a participation certificate. Various renewals of the loan were made, all upon participation certificates, and the loan was reduced to $15,000. On April 26, 1931, the Board of Industrial Fund Directors voted to grant another participation certificate for another renewal of the loan, and such a certificate was issued upon the renewal of the loan by the Lowell Trust Company upon a demand note. When that vote of the Board of Industrial Fund Directors was taken, only seven members were present, so that the affirmative vote of every one was necessary for the approval of the renewal of the loan and the issue of a participation certificate. One of them was George M. Harrigan, then and for a long time past the president and a director of the Lowell Trust Company, the lender, and the agent of the Lowell Trust Company in the making and renewal of the loan.
On December 16, 1931, under order of the defendant commissioner of banks, the defendant Lowell Trust Company closed its doors and went into liquidation. On July 22, 1932, the loan to the Model Shoe Company, Inc., then amounting to $12,500 with interest from October 15, 1931, remaining unpaid, and, that company having made an assignment for the benefit of its creditors, the Lowell Trust Company demanded of the trustee that it levy an assessment upon the subscribers to make good its loss, and the trustee threatened to levy such an assessment. The plaintiffs brought this bill on October 24, 1932, against the trustee, the Lowell Trust Company and the commissioner of banks, to restrain any such assessment and to obtain a cancellation of the participation certificate. The Lowell Chamber of Commerce, though not formally made a defendant, answered to the bill, and was treated as a party. Thus it became bound by the result of the case. First Baptist Church of Sharon v. Harper, 191 Mass. 196, 199, 210. Compare Hanscom v. Malden Melrose Gas Light Co. 220 Mass. 1, 3. The defendant commissioner of banks, by way of counterclaim under Rule 32 of the Superior Court (1932), prays that an assessment may be ordered.
The Superior Court entered a final decree, giving relief on the counterclaim by ordering an assessment on the subscribers to be levied and collected. Impliedly the plaintiffs' bill was dismissed, though it would have been better practice had this been done expressly. The plaintiffs appealed.
This case does not require us to decide how far the acts of agents, trustees or corporate directors are invalidated by the fact that one or more of them may be interested on the other side of the bargain. Copeland v. Mercantile Ins. Co. 6 Pick. 198, 203. New-York Central Ins. Co. v. National Protection Ins. Co. 14 N.Y. 85. Ferguson Fries v. Gooch, 94 Va. 1 (agents). Flint v. Codman, 247 Mass. 463, 471 (partners). Hayes v. Hall, 188 Mass. 510 (trustees). Lazenby v. Henderson, 241 Mass. 177. Guay v. Holland System Hull Co. 244 Mass. 240. Beaudette v. Graham, 267 Mass. 7 (directors). Crowell Thurlow Steamship Co. v. Crowell, 280 Mass. 343, 361. Geddes v. Anaconda Copper Mining Co. 254 U.S. 590, 599. Irving Bank-Columbia Trust Co. v. Stoddard, 292 Fed. Rep. 815. Hellier v. Baush Machine Tool Co. 21 Fed. Rep. 2d 705 (interlocking directors). In this connection it is to be noticed that directors in relation to stockholders ( Goodwin v. Agassiz, 283 Mass. 358), and stockholders in relation to the corporation ( Bell v. Fred T. Ley Co. Inc. 278 Mass. 60, 75; United States Steel Corp. v. Hodge, 64 N.J. Eq. 807, 813), are not held to the full measure of fiduciary duty.
The reason why it is unnecessary to decide the question just mentioned is that the agreement under which the Board of Industrial Fund Directors was created impliedly gave to its members the right to act for both sides. All ten members were required to be subscribers. As such their direct interest lay in restricting the issuance of participation certificates. Five of them, chosen by the Chamber of Commerce, had no other interest, except their interest as citizens of the community. But each of the other five was chosen by a bank. In view of the personal interest of the five members chosen by the Chamber of Commerce, it is fair to infer that a member chosen by a bank was expected in part at least to represent that bank and protect its interest. The direct interest of each bank was to obtain participation certificates upon its own loans, and to have them refused upon the loans of others. None of the members was really impartial. If either group of five had been impartial, it would still have been impossible to obtain seven impartial votes. It is plain that seven impartial votes were not required or expected. The agreement contemplated a balancing of conflicting interests in the membership of the board, and action by a substantial majority of interested persons. Accordingly, the vote of Harrigan was properly counted as one of the seven votes required.
Decree affirmed with costs.
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