Irving Trust Company v. Deutsch

United States Court of Appeals for the Second Circuit · 1934 · Corporations

73 F.2d 121 (2d Cir. 1934)

Updated August 22, 2026

CorporationsFiduciary dutyCorporate opportunitydirectorsundivided loyaltyself-dealingjoint and several liabilityknowing participant

Facts

Acoustic, a Delaware corporation, accepted an offer from Reynolds & Co. for a one-third participation in the purchase of 600,000 shares of De Forest stock, which would also give Acoustic director representation and a chance to obtain a management contract that could provide access to essential radio patents. Acoustic's directors believed the corporation lacked the funds or credit to make the purchase, and after accepting the offer on Acoustic's behalf, certain directors and Bell arranged for individuals to make the purchase personally; the stock was issued to members of the Biddle syndicate, who later sold shares at large profits. The trustee claimed that the directors and Bell had appropriated Acoustic's contractual rights and that other defendants had assisted in the breach. Deutsch also argued that a later general release barred claims against him.

Issue

Whether directors of a solvent corporation may take for themselves a corporate contract or opportunity after binding the corporation to it, on the theory that the corporation lacked funds or credit to perform, and whether nonfiduciaries who knowingly join in that diversion must also account for profits. The court also considered whether a general release given by the corporation to Deutsch barred recovery for this undisclosed transaction.

Rule

If directors undertake a venture on behalf of a solvent corporation, they may not later substitute themselves for the corporation and divert the contract or its possible benefits to their own profit on the plea that the corporation lacked funds or credit to perform. Equity applies a rigid rule of undivided loyalty, and one who knowingly joins a fiduciary in an enterprise in which the fiduciary's personal interest is or may be antagonistic to the trust is jointly and severally liable for the profits. A general release obtained by a fiduciary does not cover an undisclosed transaction within the fiduciary relationship absent full and frank disclosure.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Lakeview Components, a solvent Ohio corporation based in Cleveland, voted to accept a supplier's offer to acquire a one-third interest in a battery-technology venture that would likely secure manufacturing access crucial to its business. Two directors later said the company probably could not borrow enough to close, so they bought the interest personally and resold it six months later at a large profit.

If Lakeview's bankruptcy trustee sues the directors for the profit, what is the strongest argument for imposing liability?

Explanation. The controlling rule is rigid: if directors undertake a venture on behalf of a solvent corporation, they may not later replace the corporation with themselves and divert the contract or its possible benefits to their own profit by claiming the corporation lacked funds or credit. The majority rejected a financing-based excuse because it would tempt directors to underexert themselves in obtaining funds for the corporation.