The opinion of the court was delivered by: Robert D. Morgan, Chief Judge.
Illinois Valley Acceptance Corporation (I.V.A.C.) filed suit
against the appellants in the Circuit Court in Peoria County,
Illinois. In 1979, appellants and one other individual filed an
involuntary bankruptcy petition against I.V.A.C. Involuntary
bankruptcy was ordered in 1980, a trustee was appointed for
debtor's estate and substituted as plaintiff in the suit. The
case was then removed to the bankruptcy court and was tried by
the Bankruptcy Judge without a jury. The bankruptcy court found
appellant Martin guilty of breach of fiduciary duty to I.V.A.C.
for his failure to disclose his interest in Illinois Security
Systems, Incorporated (I.S.S.I.), while continuing to deal with
I.S.S.I. on behalf of I.V.A.C. Appellant Anderson was held
liable because he knew of Martin's situation but failed to
disclose it to the Board of Directors of I.V.A.C. The
transactions complained of were loans made to I.S.S.I. by
I.V.A.C., and approved by appellants, from May 5, 1972 to the
time of Martin's resignation from the Board of Directors of
I.V.A.C. on January 5, 1977.
This is an appeal from the decision of the Bankruptcy Judge
entered on September 11, 1981. In that decision, appellants
Martin and Anderson were found to be jointly and severally
liable to appellee, I.V.A.C., in the amount of $230,000. The
reason for the liability was that appellants had breached their
respective fiduciary duties to the appellee corporation.
Several questions have been raised by appellants. Initially,
however, it should be noted that this court must "accept the
referee's (Bankruptcy Judge's) findings of fact unless they are
clearly erroneous, and shall give due regard to the opportunity
of the referee to judge the credibility of the witnesses."
In re Maitlen, 658 F.2d 466, 470 (7th Cir. 1981);
see In re Solomon, 506 F.2d 463 (7th Cir. 1974); Rule
52(a), F.R.Civ.P. On the other hand, the "clearly erroneous"
standard is inapplicable when the court reviews findings on
questions of law or mixed questions of law and fact. In such
situations the findings of the. Bankruptcy Judge can only be
approved upon the court's "independent determination of the
law." In re Maitlen, supra. See Minnick v. Lafayette Loan
& Trust Co., 392 F.2d 973 (7th Cir. 1968), cert.
denied, 393 U.S. 875, 89 S.Ct. 170, 21 L.Ed.2d 146 (1968).
On page 6 of his opinion of September 11, 1981, the
Bankruptcy Judge listed twelve findings of fact. The court is
satisfied that at least six of those findings are findings of
fact. Further, it appears that they are not clearly erroneous
and must be approved by this court. The remaining six findings
are perhaps best characterized as mixed questions of law and
fact. Those findings are: (1) In not disclosing this
information (Martin's position as director and stockholder of
I.S.S.I.) to the Board of Directors (of I.V.A.C.), both Martin
and Anderson were guilty of a willful breach of their fiduciary
duty to the Debtor; (2) The Board of Directors of the Debtor
did not acquiesce in the loans made to I.S.S.I.; (3) The Board
of Directors of the Debtor did not ratify the transactions with
I.S.S.I.; (4) The actual loss sustained by the Debtor as a
result of the actions of Martin and Anderson was $230,000; (5)
The personal financial interest of Martin in I.S.S.I. was in
conflict with his fiduciary duty to the Debtor; (6) Anderson's
failure to advise the Board of Directors (of I.V.A.C.) of
Martin's relationship with I.S.S.I. was a violation of his
fiduciary duty to the Debtor.
For the following reasons those findings are approved, and
the decision of the Bankruptcy Court is affirmed.
It is clear that interlocking directorates are not fraudulent
per se, and therefore transactions between
corporations sharing common directors are merely voidable, upon
a showing of fraud or unfairness. Delaware Corporation Law,
Title 8, ch. 1, § 144. See, e.g., Shlensky v. South
Parkway Bldg. Corp., 19 Ill.2d 268, 166 N.E.2d 793 (1st
Dist. 1960). However, the court is not concerned with merely
setting aside the transactions between I.V.A.C. and I.S.S.I.
The court is primarily concerned with the question of whether
Martin's actions constituted a breach of his fiduciary duty to
I.V.A.C. Thus, appellant's reliance on the argument that the
Bankruptcy Judge erred in not determining whether the loans to
I.S.S.I. were fair or reasonable to I.V.A.C. is misplaced.*fn1
It appears to this court, however, that Martin breached his
fiduciary duty of disclosure to I.V.A.C., in spite of the
possibility that the transactions may otherwise have been
Similarly, because the soundness of the loans is not really
determinative of the question of breach of duty, the reliance
by appellants on the "business judgment rule" is unfounded.
There is no indication in the Bankruptcy Judge's opinion that
he found appellants liable for errors in judgment. Rather, it
was the appellants' failure to disclose important information
to I.V.A.C.'s Board of Directors on which liability rests. That
is, while Martin's simultaneous interest in I.V.A.C. and
I.S.S.I. may not have been fraudulent, the manner in which he
conducted dealings between the two companies was obviously less
than open and forthright. Along similar lines, while Anderson
did not have an interest in I.S.S.I., at all relevant times he
was a director of I.V.A.C., a director with knowledge, at
least, of another director's potential conflict of interest.
The standard to which corporate officers and directors are
held is, of necessity, a strict one. There is no doubt that at
times this may work harsh results. That fact does not detract
from its purpose and objective. Martin was interested, directly
or indirectly, in the success or failure of I.S.S.I. Thus, it
appears that Martin's failure to disclose to I.V.A.C. his
relationship with I.S.S.I. (apparently willful), constituted a
conflict in his dual role of director of both companies. It
does not matter that the relationship was knowable or
discoverable by the other directors. Martin was under a
positive duty to inform them of his position. Generally,
knowledge of corporate records and documents is imputed to all
directors. However, that imputation of knowledge only works in
favor of dealings with third parties and not in favor of fellow
directors or officers. Harris Trust & Savings Bank v.
Joanna-Western Mills, 53 Ill. App.3d 542, 11 Ill.Dec. 78,
368 N.E.2d 629 (1st Dist. 1977) (applying Delaware law).
Ordinarily, one director is not liable for the misconduct of
a codirector, where he has not actually participated in the
misconduct, that is, unless the "innocent" director has
acquiesced in, or concealed, the misconduct (see, e.g.,
Bellis v. Thal, 373 F. Supp. 120 (E.D.Pa. 1974),
aff'd 510 F.2d 969 (1975), or if it was his neglect of
duty that led to the loss. See, e.g., Heit v. Bixby,
276 F. Supp. 217 (E.D.Mo. 1967). In this case it is alleged that
Anderson breached his fiduciary duty to I.V.A.C. by failing to
disclose the fact that Martin may have been in a position where
his interests in I.S.S.I. and I.V.A.C. were in conflict.
The standard of care owed by directors (such as Anderson) in
the management of the corporations' affairs is that care which
a reasonably prudent director of
a similar corporation would have used under the circumstances.
See Briggs v. Spaulding, 141 U.S. 132, 11 S.Ct. 924,
35 L.Ed. 662 (1891). Thus, in order to avoid liability for
permitting mismanagement, it is incumbent upon a corporate
director, on learning facts sufficient to put a prudent man on
guard, to take the appropriate action under the circumstances.
Graham v. Allis-Chalmers Mfg. Co., 41 Del. Ch. 78,
188 A.2d 125 (1963 S.Ct.). In this case the appropriate action
would have been full disclosure of Martin's situation, and
Anderson was negligent in not making such a disclosure. A
reasonably prudent director would have done so.
In some respects, an officer or director of a corporation is
an agent of the corporation. Thus, an officer is under a duty
to "disclose to it [the principal corporation] any facts coming
to his knowledge in the course of his agency which may affect
its interests; a failure to do so is a breach of duty."
Cahall v. Lofland, 12 Del. Ch. 299, 114 A. 224 (1921),
aff'd, Lofland v. Cahall, 13 Del. Ch. 384, 118 A. 1
(1922). The principle pertaining to disclosure by the agent to
the principal of relevant information applies equally to the
officers and directors of a corporation. Science
Accessories Corp. v. Summagraphics Corp., 425 A.2d 957
(Del.S.Ct. 1980). In this case, both Martin and Anderson were
"agents" of I.V.A.C. in its dealings with other entities, but
both failed to inform the Board of Directors of I.V.A.C. of the
fact that Martin was also a director and officer of I.S.S.I.
The court is satisfied that the amount of damages determined
by the Bankruptcy Judge was appropriate, based on the evidence
Further, the court is satisfied that the other directors of
I.V.A.C. had insufficient knowledge of the facts to have
ratified the transactions with I.S.S.I., Young v.
Janas, 34 Del. Ch. 287, 103 A.2d 299 (1954), and that any
actions taken by the Board after Martin's resignation as
president of I.V.A.C. were insufficient to constitute
acquiescence or ...