the American Vault, Safe & Lock Company. From the decree, Lewis McMullen appeals. Affirmed. The following is the report of the auditor: "There is some controversy concerning a number of claims presented. Such will appear in the schedule immediately after the list of wage claims, and in the order here considered. "(1) Lewis McMullen, Trustee, v. American Vault, Safe & Lock Company, D. S. B. No. 150, December term, 1893, $8,568.30, on which has been paid $640. Upon this judgment, the entire fund for distribution, as shown by the account, is claimed. "At a meeting of the board of directors held on June 12, 1893, a resolution was adopted authorizing the execution of a judgment note to cover the claim of S. O. Rhodes, P. T. B. Shaffer, T. W. Martin, B. W. Applegate, C. H. Underwood, C. F. Sheriff, and Josiah Speer, directors of defendant company, for money theretofore raised by them to pay a note of the company, originally $10,000, then reduced to $8,000. A fi. fa. was issued thereon at No. 150, December term, 1893, on October 10, 1893, and that writ is still in the sheriff's hands. Testimony was offered by exceptants as to the validity of this judgment. Counsel for the receiver maintain that the auditor has not power to go into the question. The cestuis que trustent under the judgment were the directors and officers of defendant company. Josiah Speer, secretary and general manager, now receiver, was one of them. In view of the facts that assets of very considerable value have been lost under the receiver's management of his trust, and it is sought to have what little is left appropriated to a judgment in which he, as well as all the other directors, is interested, your auditor considers that under the authority of Wenger's Estate, 2 Pa. Super. Ct. 611, and Wright's Estate, 182 Pa. 90, 38 Atl. 151, he was justified in hearing the testimony and finding the facts. "On June 12, 1893, a resolution of the board of directors was passed, authorizing the proper officers of the company to execute a judgment note to Lewis McMullen, trustee, in an amount sufficient to protect the officers of the company on their indorsement of a certain note in the Central Bank for $8,000 Josiah Speer says: 'I was in charge, and, also being an interested party on that indorsement, my recollection is that I was told to watch the condition of the company, and, if it was able to take care of its paper itself, there would be no necessity of entering a judgment. While the board had directed it to be given, yet there was no specified time. When I felt that there was danger, I notified the board, and called them together, and they directed then that the note be made in favor of Lewis McMullen, trustee.' directors' meeting of September 4, 1893, a At a resolution was adopted directing the secretary to place in the hands of Lewis McMullen a judgment note for $8,000, for use of indorsers on the Central Bank note for that amount. The note is dated June 13, 1893. It does not appear, other than from the above testimony, when it was actually drawn. "Under the authorities, officers who have the power to protect themselves, and have exercised it, must show that the contract was fair under all circumstances. In Mueller v. Fire Clay Co., 183 Pa. 450, 38 Atl. 1009, the court says, 'Even if the judgment was entered after insolvency was known, yet the contract having been made before insolvency, as an indemnity to the directors for individual indorsements, such judgment could be enforced as a lien against the corporate property, as in Neal's Appeal, 129 Pa. 64, 18 Atl. 564.' The "The directors had borrowed $10,000 on the promissory note of the company, indorsed by them, in August or September, 1892, from the Central Bank of Pittsburg. On the date this preference was authorized there was $8,000 still due on that note. question, then, is, were the defendant company's affairs in such condition when the judgment was authorized to be confessed that such action could be taken by the directors without prejudice to the rights of other creditors? Take, for example, second invent- The manager, Josiah Speer, in his .... $126,813 01 $ 52,410 65 45.550 00 88,950 00 "At the same meeting at which the judgment note was authorized to be given by the officers, June 12, 1893, the minutes say: "The general manager reported that he had been unable to discount any paper last week, and, being without funds, could not pay the hands on Saturday last; that the concern is in rather an embarrassing condition, the Chicago branch being slow in making remittances.' The following motion was adopted: 'Whereas, the Chicago branch of this company has proven an unfailing source of loss to this company, and we find it beyond our ability to render it profitable: Therefore be it resolved, that Josiah Speer be and is hereby directed to proceed to Chicago at once and discontinue said branch,' Then follow some instructions in detail. The judgment note authorized at that meeting seems never to have been given, for on September 4, 1893, the directors adopted substantially the same resolution, after having first heard the report of a committee that 'it had been unable to procure a loan or assignments of contracts.' 'The general manager reported he had not written to creditors, yet, asking for an extension of time on our accounts, for the reason he had on hand a likely sale of a block of capital stock. The parties are to be up on Tuesday afternoon train.' Then a claim due from the United States government was assigned to S. W. Applegate to repay him for $500 he had paid on the company's note in the Central Bank. Then the following resolution was passed, viz.: 'Whereas, this company having become involved in an indebtedness, being balance for construction for material and labor, together with interest on its bonded indebtedness, amounting to the sum of over $26,000, and our resources do not seem to be sufficient to pay the same at once, and some of our creditors pushing for judgment: Therefore be it resolved, that this company joins with our creditors wishing a receiver appointed, to take charge of its affairs, and ask the court to appoint some person competent to act as receiver until such time as it can do business without embarrassment and complete the contracts now on hand, and pay its accounts. This course seeming best in the interest of all creditors and stockholders.' "But going back of the question of the financial standing of defendant company at the date the resolutions just quoted were passed, we find from the minutes and oral testimony that the company was organized with a capital stock of $4,000. On July 14, 1891, a directors' meeting called a stockholders' meeting on July 15, 1891, at which the increase of the capital stock to $200,000 was authorized. On the same day a directors' meeting provided for the issuing of $50,000 preferred stock, and a stockholders' meeting voted in favor of such issue. On August 17, 1891, at a stockholders' meeting, the minutes of the last-mentioned action were approved, and the number of directors increased from three to seven. The minutes of a directors' meeting of August 18, 1891, and a stockholders' meeting on September 10, 1891, show the creation of a bonded indebtedness of $25,000. The stockholders met on August 20, 1891, and entered into an agreement on the part of the company with E. W. Neff and C. H. Underwood to purchase the assets of the Chicago Safe & Lock Company from them at $130,000, payable $30,000 cash, $25,000 in notes or bonds, and $75,000 in stock of the company; the stock to be issued to Neff & Underwood, and the cash, notes, or bonds to be paid to the Chicago Safe & Lock Company. Neff and Underwood at that date had an option to purchase said effects at the price of $25,000. At a special board meeting of October 31, 1891, J. R. Wiley, the treasurer, stated that he could not conscientiously countersign the stock certificates authorized by the board to be issued to Neff & Under wood, and he resigned his position. On motion of Martin, seconded by Applegate, the resignation was accepted, and R. T. Wiley was elected in his place. The receiver was requested to produce an inventory of the assets of the Chicago Safe & Lock Company, which he did not do. A directors' meeting of December 7, 1891, provided for calling a meeting of the stockholders on December 19, 1891, 'to devise some plan to relieve the company from its embarrassment occasioned by the failure of the Blaine Land and Improvement Company to complete our factory buildings.' On August 25, 1891, a resolution was passed by the board under which I. C. Tuttle loaned to T. W. Martin and Applegate, for the defendant company, $2,500, upon condition of receiving therefor a bonus of $500 of the stock of Underwood; Tuttle agreeing to subscribe for $500 of the company's stock, the company paying him a bonus therefor of $150 cash, provided, further, that $1,000 of said stock be preferred stock. The minutes further show that on January 22, 1892, the company confessed a judgment to Martin & Applegate, to secure them in having procured this loan in the sum of $2,000, the amount then unpaid. The minutes of January 16, 1892, show action by the board for the sale of $50,000 of the stock of the company at figures netting the company seventy-five cents on each dollar of stock sold. On July 17, 1893, the minutes show that the company was indebted to Josiah Speer in a considerable sum, and, being unable to pay any part of it in cash, it was paid by Speer's taking from the company six safes at nineteen per cent. of the list price. The minutes of a stockholders' meeting on July 25, 1893, show liabilities of the company at that date, beyond the bonded indebtedness, of $22,632.05; and on the same day the directors took action on the sale of the entire stock of the Chicago branch, including rented safes, to Mrs. M. A. Bigford, at twenty-two and onehalf per cent. of list price. Mr. Speer says in his testimony that the company received $58,000 to $63,000, he thinks, in cash, from the sale of stock, and that it sold at par. Rose, Shaffer, Applegate, and Speer being present, a resolution was passed recommending to the stockholders' meeting the sale of stock for fifty cents on the dollar. "Your auditor therefore finds that at the dates of the authorization of the judgment note, June 12, 1893, and September 4, 1893, the defendant company was insolvent; that the directors for whose benefit the judgment was confessed did not indorse the company's paper upon an agreement that they should be secured by such note; that the execution issued upon the judgment two days before the appointment of the receiver has not been returned; and, as a matter of law, that the trustee for the directors is not entitled to his claim in full, to the prejudice of the rights of other creditors, but shall receive his pro rata dividend of the funds for dis tribution, and, further, that the receiver be surcharged with $730.12, the sum he paid the trustee on account of said judgment." Argued before MITCHELL, DEAN, FELL, BROWN, and MESTREZAT, JJ. John F. Cox, for appellant. J. H. Beal, O. P. Robertson, J. P. Patterson, H. L. Goehring, J. H. Reed, George E. Shaw, and Edwin W. Smith, for appellees. MESTREZAT, J. The principal and important question in this appeal is raised by the second assignment of error, wherein the appellant complains that the auditor and court below erred in finding that his judgment was not a preferred claim, and was not entitled to preference in the distribution of the fund in the hands of the receiver. The position of the appellant is stated in the assignment as follows: "The claim of the exceptant having been reduced to a judgment before the appointment of a receiver, and being a lien upon the real estate and part of the fund in the hands of the receiver (being the proceeds of the sale of real estate upon which exceptant's judgment was a first lien), the said judgment was entitled to be paid in full out of said fund, and an execution having been issued and in the hands of the sheriff and in force prior to the appointment of a receiver, and proceedings thereon being only suspended by order of the court appointing the receiver, was not, therefore, affected by said appointment, and became a first lien upon the said personal property." The facts bearing upon this claim as found by the auditor may be briefly stated: The American Vault, Safe & Lock Company was incorporated in 1891, and engaged in the manufacture and sale of vaults and safes in Allegheny county. In August or September, 1892, the directors of the company borrowed $10,000 of the Central Bank of Pittsburg on a note of the company indorsed by them. The amount of the note was subsequently reduced to $8,000. On a bill filed by an unsecured creditor, the court, on October 11, 1893, appointed Josiah Speer receiver; reciting in the order that, "upon consideration of said bill and answer [of defendant company], the court find that the defendant company is in an insolvent condition." The receiver took possession of the property, real and personal, and continued to operate the plant until September 24, 1894, when, under an order of court, he sold it at public sale. The proceeds of this sale are in court for distribution, and Lewis McMullen, trustee, the appellant, claims that his judgment given to secure the directors for the indorsement of the company's note should be paid in full out of the fund. The board of directors adopted a resolution on June 12, 1893, authorizing the execution of a judgment note to cover the claim of S. O. Rhodes, P. T. B. Shaffer, T. W. Martin, B. W. Applegate, C. H. Underwood, C. F. Sher iff, and Josiah Speer, directors of the company, for money theretofore raised by them to pay a note of the company. At a directors' meeting on September 4, 1893, the secretary of the company was directed to place in the hands of Mr. McMullen a judgment note for $8,000 for the use of the indorsers on a note of the Central Bank for that amount. Pursuant to the action of the board of directors, the judgment note, the subject of this controversy, was given to the trustee. Judgment was entered on the note on October 9, 1893, and a fi. fa. was issued thereon October 10, 1893. The auditor found-and no exception was taken thereto"that at the dates of the authorization of the judgment note, June 12, 1893, and September 4, 1893, the defendant company was insolvent; that the directors for whose benefit the judgment was confessed did not indorse the company's paper upon an agreement that they should be secured by such note; and that the execution issued upon the judgment two days before the appointment of the receiver has not been returned." The facts found by the learned auditor are clearly deducible from the evidence. It is equally apparent from the testimony that, at the time the judgment note was authorized to be executed, the directors knew the insolvent condition of the corporation. The auditor and court below were therefore right in holding that the appellant was not entitled to have his claim paid in full out of the fund for distribution. There is no equity in the claim of the appellant that would sustain a contrary conclusion, on the facts disclosed by the evidence. The indorsement of the company's paper was made by the directors in 1892. They were not induced to assume this liability by reason of any misunderstanding or agreement that they should be protected by the company. The company at that time was presumably solvent and fully able to meet its obligations. The credit of the directors was not used to assist it in an emergency, nor to protect the corporate property from sacrifice. Several months after they became indorsers to the Central Bank, the directors undertook to secure themselves against the liability they had incurred the previous year, and by resolution authorized the execution of the judgment note upon which they claim a preference here. In the meantime conditions had changed, and the corporation had become hopelessly insolvent. After this was known to the directors, they directed the secretary of the company to deliver the note to their trustee. One of the directors, who was also the receiver, gives the circumstances under which the note was made, and clearly discloses the unfairness of the transaction. He testifies: "I was in charge, and, also being an interested party on that indorsement, my recollection is that I was told to watch the condition of the company, and, if it was able to take care of its paper itself, there would be no necessity of entering a judgment. While the board had directed it to be given, yet there was no specified time. When I felt there was danger, I notified the board, and called them together, and they directed then that the note be made in favor of Lewis McMullen, trustee." At the meeting of the directors on September 4, 1893, when they authorized the making of the note, they resolved to join with other creditors in having a receiver appointed for the company. Two days prior to the appointment of the receiver, a judgment was entered on the note, and an execution issued thereon. This conduct of the directors was a clear violation of their official duties, and could secure for them as individuals no preference over other creditors of the company. Their action was not taken for the benefit of the company, but solely to give themselves a preference in the distribution of its assets. The burden was upon them to show that the preference was in all respects fair and conscionable, and that it was not collusive, for the mere purpose of preference. Cowan v. Pa. Plate Glass Co., 184 Pa. 1, 38 Atl. 1075. This they have failed to do. They are therefore within the well-settled rule forbidding a preference which is recognized in the decisions of this court, and stated in Morawetz on Corporations, § 787, as follows: "Directors of an insolvent corporation, who have claims against the company as creditors, must share ratably with other creditors in the distribution of the company's assets. They cannot secure to themselves any advantage or preference over other creditors by using their power as directors to that purpose. Their powers are heid by them in trust for all the creditors, and cannot be used for their own benefit." The first assignment is based on a misapprehension of the facts. The wage claims were not allowed a preference out of the fund produced by the sale of the real estate, as the appellant claims; but, as distinctly stated by the auditor, they were held to be a lien, and payable out of the proceeds of the personalty with which the auditor surcharged the receiver. The other assignments need no special consideration. The claims which are the subject of these assignments were properly allowed to participate in the distribution of the fund in the hands of the receiver. The assignments of error are dismissed, and the decree is affirmed. (205 Pa. 93) PANGBURN et al. v. AMERICAN VAULT, SAFE & LOCK CO. (No. 2.) (Supreme Court of Pennsylvania. Jan. 5, 1903.) RECEIVER-NEGLIGENCE-LIABILITY. 1. A receiver will be surcharged with the loss arising from his negligence in the management of the trust property, where he has wasted its assets and has sold the personal prop erty at an inadequate price, and has been interested in its purchase, and his commissions also will be disallowed. Appeal from Court of Common Pleas, Allegheny County. Bill by E. H. Pangburn and others against the American Vault, Safe & Lock Company. From the decree, Josiah Speer, receiver, appeals. Affirmed. The following is the report of the auditor: "Findings of Facts. "(1) Josiah Speer was appointed receiver of the property and assets of the American Vault, Safe & Lock Company by decree of this court made October 11, 1893, and immediately took possession of the property of the company. "(2) As such receiver, there came into his possession, among the assets of the company, merchandise, consisting of finished and unfinished safes, raw materials, and so forth, to the amount of $36,088.89; bills and accounts receivable, $3,269.75; and real estate, plants, tools, and other property of the company. "(3) The receiver operated the works of the company from the date of his appointment until after September 29, 1894; and this was done by him upon his own responsibility, without any authority from the court, with the exception of a contract known as the 'Pennsylvania Railroad Contract,' on which contract he lost $1,244.01. "(4) On September 29, 1894, the receiver, at public sale, under order of court, sold the unoccupied, real estate of the company to J. R. Wylie for $2,000, which sale was confirmed by the court absolutely, and the money paid to the receiver. On "(5) On the same day, at a like sale, he sold the remaining real estate and plant of the company, and the personal property then on hand, to Hugh Morrison, at $10,000 for the real estate, and $1,300 for the personal property. This sale was confirmed absolutely on October 20, 1894. It was subsequently set aside by an order made January 13, 1896. June 20, 1899, at the request of the receiver, he was permitted to make a sale of the property to M. M. Garland at $10,000 for the real estate and $1,300 for the personal property; the said Garland to take the property as of September 29, 1894, receiving the benefits of all sales made by the receiver after September 29, 1894, and assuming all expenses incurred by the receiver after that date with respect to the said property. The sale to M. M. Garland was consummated by the receiv er, and the purchase money paid. The expenses in connection with the sales of the real estate, as shown by the accounts, amount to $936.15, and the net proceeds from sales of real estate for distribution amount to $11,063.85. "(6) The purchase made by Hugh Morrison, as well as the purchase made by M. M. Garland, was each, in point of fact, made on be half of the syndicate; and the said receiver, Josiah Speer, was a member of each of said syndicates, and interested in the purchase of the property, and this fact was not disclosed by him until long after the sale to Garland. "(7) That the value of the personal property sold by the receiver to M. M. Garland under the order above mentioned was $20,506.95; this amount being the value of the merchandise on hand at the date of the McMeans inventory, $18,106.80, and the net cash receipts in the hands of the receiver or the purchaser, $2,400.15. "(8) The receiver was negligent in his management of the trust estate, and wasted the assets thereof; his action towards the court and creditors has been characterized by an absence of good faith; his action in procur ing the sale of the remaining personal property on hand, at an inadequate price, and being interested therein as a purchaser, without disclosing that fact, was inexcusable; and, because of these facts, he has forfeited his right to commissions. "The Law of the Case. "As this case presents itself to your auditor, there are but three questions of law involved, viz.: (1) As to the liability of the receiver for the loss, or some part thereof, incurred by him in the operation of the works; (2) as to the liability of the receiver for the loss incurred in the sale to Garland, in view of the fact that the receiver was one of the purchasers at this sale; (3) as to the receiv. er's right to commissions. "(1) As to the liability of the receiver for the loss incurred in the operation of the works: The receiver having operated the works without authority from the court, it is sufficient to show the inventory and appraisement, and the burden is upon him to explain and account for the property. McCay v. Black, 14 Phila. 635. That the receiver thoroughly appreciated this fact appears from his testimony, in which he says very frankly that in operating the works he acted upon his own responsibility. That the operation of the works resulted in a large loss does not now admit of doubt. The expenses incurred by the receiver in the operation of the works not only exceeded his receipts, but, as shown by the findings of fact, his expenses exceeded the value of the merchandise coming into his possession and disposed of prior to September 29, 1894, plus all the moneys realized from bills and accounts receivable, by $2,183.86. In other words, he had a deficit of that amount. So that, as a matter of fact, the loss occasioned by the conduct of the receiver in this respect would amount to the difference between the assets coming into his hands at the date of his appointment and the amount remaining in his hands on September 29, 1894. But looking at the case in this aspect, the receiver would be entitled to some reasonable allowance for collecting these bills receivable, and disposing of the personal property in the condition in which it was at the time he took charge of it. No testimony has been presented to the auditor to enable him to make a finding upon this theory. Taking into consideration all of the circumstances of the case, and the receiver's statement that in the operation of the works he acted upon his own responsibility, it seems to the auditor that the least responsibility to which he could be held would be to require him to bear the amount of the deficit which he incurred-in other words, require him to pay the excess of his expenditures over the value of the property taken possession of and disposed of by him. He certainly cannot charge this deficit, occurring in the operation of the works, as against the moneys realized from the sale of real estate; nor has he any right, as it seems to your auditor, to deduct it from the amount found to be due from him to the creditors by reason of his conduct in purchasing at his own sale. The auditor is therefore of the opinion that the accountant should be surcharged with the amount of the net deficit arising from his management of the trust estate between October 11, 1893, and September 29, 1894, which amounts to $939.85. In ascertaining this amount, the auditor has allowed the accountant credit for $1,244.01; being the amount shown as the loss incurred on the Pennsylvania Railroad contract, which contract was authorized by the court, and also the loss on the item of bar iron, $3,564. "(2) As to the liability of the receiver for the loss incurred in the sale to Garland: The auditor has already found that the receiver was interested as a purchaser in the sale made by him to Garland, and that the amount realized for the personal property on this sale was vastly less than its real value. The great number of cases in which attempts have been made by executors, administrators, trustees, assignees, and receivers to purchase the trust property at their own sales, either directly or through the intervention of third parties, probably illustrates the necessity for the strict rules established by the courts in this class of cases. Be that as it may, in Pennsylvania it is certainly well established by an unbroken line of decisions, extending from Moody's Lessee v. Vandyke, 4 Bin. 31, 5 Am. Dec. 385, to French v. Pittsburg Vehicle, etc., Co., 184 Pa. 161, 39 Atl. 63, that a trustee authorized to make sale of property, whether at public or private sale, is not permitted to bid upon or purchase said property, or be interested therein; that, if he does, such a sale is voidable at the election of the cestui que trust, without reference to its fairness, or the cestui que trust may, if the property has been disposed of by the purchasing trustee, require him to account for the difference between the purchase price and the value of the property, or the profit on a resale thereof. In 20 Am. & Eng. Ency. of Law, 148, the rule is stated thus: 'A receiver will not be permitted to bid nor purchase at his |