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 ratification so as to remove the taint of the
breach of fiduciary duty by the appellants.
Accordingly, IT IS ORDERED that the decision of the
Bankruptcy Judge is in all respects AFFIRMED.