Slayden v. H. J. Seip Coal Co.

Harr, J. The answer admitted the declaration of the dividend alleged in the petition, averred the payment of one thousand dollars of the plaintiff’s share thereof, and set up certain matters as a defence to the payment of the balance of said share. The position taken by the plaintiff is, that, admitting all the allegations of the answer to have been true, he was entitled to a judgment for the balance of his share of the dividend. The question is thus presented, do the facts pleaded in the answer constitute, in behalf of the defendant, a good defence to the payment of the plaintiff’s share of the dividend ? The answer contained no allegation that the defendant was insolvent at the time of the declaration of the dividend, or that the payment of the dividend would-render the defendant insolvent. Hence, section 741, Revised Statutes, has no bearing whatever, one way or the other, upon this case, as it is presented to us. The following facts appear with sufficient clearness from the allegations of the answer, we think. The defendant, at the time of the declaration of the dividend, had not money sufficient to pay its debts, and also the dividend, for, in the language of the answer, the defendant was, at that time, “in an embarrassed condition, financially, and there were no earned profits in the treasury of the corporation subject to a dividend.” This was also true at the time of the institution of this suit, because, as alleged in the answer, the embarrassed condition of the defendant had continued ever since the declaration of the dividend; the declaration of the dividend was based upon accounts charged to profit and loss, which proved to be largely uncollectible, and were outstanding and unpaid at the time of the filing of the answer. The defendant paid on the plaintiff’s share of the dividend one thousand dollars, with money borrowed by it, in order to carry on its business. In other words, the admitted facts are, that the defendant corpo [445] ration, financially embarrassed, declared a dividend expressly based npon accounts charged to profit and loss, which proved to be largely uncollectible, and that the defendant was still financially embarrassed when this suit was begun. Such being the admitted facts, the dividend was improperly declared, and the defendant cannot be required to pay it. Dividends can be paid only out of profits or the net increase of the capital of a corporation. Morawetz on Priv. Corp., sect. 344. Each stockholder is entitled to have the capital preserved unimpaired, for the purpose of carrying on the business for which the company was formed. Id.; see also, sect. 404. These principles are well established by the authorities cited by the author referred to. The directors of a corporation have, in declaring dividends, a large discretion, with which the courts will not interfere. But, of course, such discretion must be exercised reasonably, in accordance with the existing circumstances, and must not be abused. A dividend might be proper in one case and improper in another. A dividend, proper in the case of a prosperous corporation, would be improper in the case of an embarrassed corporation. In no case should a dividend be declared, unless there are, at least, apparent profits on which to base it. It may be conceded, for the presént case, that a corporation may declare a dividend on uncollected accounts, supposed to be good, and this, too, although the corporation may be in debt, if it be honestly and reasonably believed that the accounts will not be necessary to pay the debts. But such is not this case. Here the corporation was financially embarrassed. Here the dividend was declared, not on accounts supposed to be good, but on accounts supposed to be bad, and which had been charged to profit and loss. The dividend was not declared on what was supposed to be profits, but was declared on what was supposed to be losses. It was not [446] reasonable to suppose that the corporation, embarrassed ■as it was, could pay the dividend declared without impairing its capital; but, on the contrary, the necessary •consequences of paying the dividend, under the admitted facts, would have been, if not to have inj ured the creditors of the corporation, to have impaired its capital. The declaration of the dividend was, in our opinion, wrongful and illegal. The corporation has the right, on the ground of that illegality, to defend against this action. In Ins. Co. v. Page & Richardson (17 B. Mon. 442), it was held “that if dividends were made under a misconception, on the part of the directors, of what constituted profits, and under a belief that there were profits to divide, when, in fact, there were none, they might be reclaimed by the corporation, after they have been paid out,” because the stockholders who received them were not entitled to them, and they had been paid over and received under a mutual mistake. The case at bar is a much stronger case. Here the dividend might be said to have been declared with a knowledge that there had been no profits ; and here, too, there were no profits at the institution of the suit. The defence is maintainable. The plaintiff was not entitled to recover anything on the pleadings. The judgment is affirmed. All concur.