In Re the Judicial Settlement of the Account of Rogers

Haight, J. This proceeding was for an accounting before the surrogate by trustees. The facts are without substantial dispute, and are very clearly stated in the findings of the surrogate to which we refer for the details. For the purpose of presenting the question which we are called upon to review, they may be briefly stated as follows : Jason Rogers died in the town of Westchester on the 25th day of August, 1868, leaving a last will and testament in which he created three separate trusts for the benefit of his children during their lives with remainders to their issue. He named trustees, and of the property devised to them, constituting a part of the capital of each trust, were shares of the capital stock of the Rogers Locomotive and Machine Works. That corporation was organized under the laws of Rew Jersey, and carried on its business of manufacturing locomotives and machinery at Paterson, Rew Jersey. Its capital stock was $300,000, represented by three thousand shares of the par value of $100 each. At the time of the decease of the testator the stock of the corporation owned by him was appraised at the sum of $125 per share. The • corporation continued business until 1893, paying dividends each year, at first of 10% and later on of 20<%. At that time it sold its plant, consisting of lands, buildings, water power, machinery,- tools and fixtures, together with its raw material and that in the process of manufacture, for the sum of $2,750,000 to be paid in the stock of a new corporation known as the Rogers Locomotive Company, whose *112 capital stock was $3,000,000, represented by share stock of the par value of $100 each. The stock of the new company obtained from the sale of the plant of the old company, was divided among the stockholders of the old company in the proportion of ten shares of the new stock for one share of the old. After making this sale the Rogers Locomotive and Machine Works remained possessed of other property which it had accumulated consisting of cash on hand, bills receivable, real estate in some of the western states, government bonds and stock in railroad corporations amounting in value in round numbers to $3,000,000. This property the officers of the corporation proceeded to convert into money and distribute among the stockholders. The question presented for our review arises out of the conflicting claims of the life tenants and the remaindermen. It is claimed, on behalf of the life tenants, that the $3,000,000 of property accumulated outside of the plant is profits, and that they each should be given their proportionate share thereof. While on the part of the remaindermen it is contended that this accumulation is a part of the capital of the corporation, and that the trustees should retain their distributive share thereof as capital of the trust for their benefit. The surrogate held that the stock in the new company received on the sale of the plant of the old company, together with the first dividend declared after such sale of 100%, being the amount of the capital stock of the old company, should be retained by the trustees as capital, and that all of the other property of the corporation was profits to which the life tenants were entitled. Our attention has been called to many cases, both English and American, bearing, to some extent, upon the subject, but they furnish but little aid in the determination of the question presented under the peculiar facts of this case. An argument is made which has the sanction of some of the authorities, to the effect that all of the assets of a corporation are deemed capital until a dividend is declared. We may concede that assets are ordinarily so treated in going concerns, *113 but the rule has its limitations. The directors must act in good faith. If they fail to do so, and it clearly appears that they have accumulated earnings not required in the prosecution of the business, which they withhold from the stockholders for illegitimate purposes, a court of equity may interfere and compel a distribution of such earnings. In this case we have a manufacturing corporation that commenced with a comparatively small capital and grew to an enormous concern. It not only paid large annual dividends, but it accumulated property not used in its business of great value. It continued business until 1893, when the stockholders, at a meeting, authorized the directors to sell the business and distribute the assets. After effecting a sale of the company’s plant it ceased to do business and went into liquidation. After such sale it could no longer earn profits for distribution, and the directors were no longer vested with any discretion with reference to the conduct of the business or judgment as to the amount of assets that should be retained and employed as a working capital. They, therefore, had no power to determine questions arising between remaindermen and life tenants. That power devolved upon the courts. Their only remaining duty was to convert the assets into money and to divide it among the stockholders. ' What then is capital aud what is profits 1 In a manufacturing business a plant is of first importance, and as the business increases an enlargement thereof, with the necessary tools, fixtures and machinery, is one of the things to which the earnings of the company may properly be devoted. This must be deemed to be fairly within the contemplation of the testator in creating the trusts with the capital stock of this company. After the plant there arises a necessity for raw material and labor to manufacture it. This requires what is usually termed a working capital, and it, of necessity, varies in amount depending upon the magnitude of the business. It must, therefore, also have been within the contemplation of the testator that a reasonable amount would be retained by the directors for this purpose. *114 The sale of the plant, as we have seen, included the stock ■ of raw material on hand and that in the process of manufacture, and we must assume that the sum obtained from such sale included so much of the working cajfital as was necessary for the procurement of raw material. It does not, however, include the working capital necessary for the procurement of the labor to continue the business until the manufactured arti-cles could be marketed and realized upon. The evidence fails to inform us as to the amount that was required to be retained by the directors for this purpose and we are, consequently, left without the means to determine that fact. The appellants claim that all of the assets were necessary, but this we cannot admit. It is very clear that the investment in government bonds, railroad stocks, and lands in the western states was not capital employed in the business of the corporation, and, consequently, was not necessary as a working capital. As we have seen, the surrogate held that all that was received upon the sale of the plant should be retained by the trustees as capital, and this included that which had been paid out for raw material. He also held,that the'first cash dividend made on the liquidation of $100 per share should also be retained by them as capital. It may be that the company required a larger working capital than this would furnish, in the conduct of its business. But in the absence of evidence showing the amount that was necessary we cannot assume that more was required than the par value of-its entire capital stock. Something has been said in the testimony with reference to credits given upon sales made by the corporation. We can readily see that the corporation in furnishing a new railroad with locomotives may be asked to give long credit, but it is not apparent how the giving- of credit upon sales made should affect the rights of the life tenants .further than to postpone the time of the distribution of the profits. We incline to the view that substantial justice has been done the parties by the order appealed from and that it should be affirmed, with costs. All concur. Order affirmed.