Lapsley v. Merchants Bank

ELLISON, J. The plaintiff was president of the defendant bank and was likewise a stockholder and director. He charges in the first count of his petition that the bank owes him a dividend of five per cent on his stock; and in the second count, that it owes him for six months’ salary as president. On trial before the court judgment was rendered for plaintiff on each count. It appears that the defendant bank was in such condition as to alarm the Secretary of State who has in charge, as a department of his office, the supervision of all banks with State charters. It had loaned to plaintiff and two others associated in the grocery business with him and also directors in the bank sums aggregating largely more than the capital stock. It was in such condition on that and other important matters as to cause the Secretary to advise the directory that if the indebtedness was not reduced and the affairs of the institution quickly put into a more satisfactory condition, he would be compelled to adopt stringent meas [101] ures Tinder the law. It appears that an examination had been made by one of the Secretary’s bank examiners in the first part of January, 1900, and that from thence on till the 29th of that month the Secretary was demanding that the institution be put upon a more businesslike footing. On the 15th of that month, the directors, including this plaintiff and his two associates in business, made and entered the following dividend, order: “After cashier had made a statement of the earnings of the bank for the past year, upon motion, the Board declared that a dividend of 5 per cent be paid to stockholders. The shares paid up in May to receive only a pro rata share of said 5 per cent according to the time the money for said shares has been in possession of the bank.” Defendant contends that this order was made without first setting aside 10 per cent of the net profits of the bank for the period covered by the dividend and was therefore in violation of the express provisions of the statute, section 1293, Revised Statutes 1899, which reads as follows: “The board of directors of any bank institution in this State, when it shall declare a dividend, shall first set apart to the surplus fund ten per cent of the net profits of the bank for the period covered by the dividend, until the same shall amount to 20 per cent of its capital stock, and said surplus shall not be diminished except for the payment of any losses which may occur: Provided, if there are undivided profits, these shall first be used in payment of such losses.” Plaintiff claims this statute to be merely directory and that a compliance therewith is not necessary to enable him to recover the dividend declared in the order. We are clearly of the opinion that plaintiff’s claim is not the proper construction of the statute. The statute in positive terms declares that 10 per cent of the net profits shall be first set apart to the surplus [102] fund until that fund shall amount to twenty per cent of the capital stock. The evident object and purpose of the statute was to create a fund, in addition to the capital stock, for the security of depositors and others doing business with the bank. Current history shows an unmistakable demand on the part of the people and a corresponding effort on the part of the law-makers to provide safe banking methods. And undoubtedly the'statute in question, which is recently enacted, was to secure that end in whatever degree it would be secured by a strict compliance therewith.' “Where the whole aim and object of the legislature would be plainly defeated if the command to do the thing in a particular manner did not imply a prohibition to do it in any other, no doubt can be entertained as to the intention.” Endlich on Statutes, section 431. As just stated, it is manifest that the ‘ ‘ aim and object” of the statute in question is to compel the accumulation of a surplus fund out of net profits, and it is equally manifest that the result may not be secured if dividends are permitted to be declared and paid out of such profits in preference to the surplus. Whenever third persons or the public have an interest in having done that which is prescribed by the legislature then the act is mandatory, even though words permissive, as “may,” are used,- instead .of words mandatory as, “shall.” Potter’s Dwarris on Statutes, 220. Before there can be a dividend which the law would recognize in a suit to recover it, there must be a net profit; 'and then the dividend can only be declared on that portion of the profit remaining after ten per cent has been set aside to the surplus fund. Such process for the allowance of dividends continues under the terms of the statute until the surplus shall have equalled twenty per cent of the capital stock. It is, however, claimed by plaintiff that defendant did not set up this defense in its answer. We are of the opinion that connecting the answer with the allegations [103] of the petition that the hoard of directors declared the dividend and that “said hoard had competent authority so to do;” it stated enough to let in such defense. The answer, besides being a general denial, alleged that the dividend was illegally declared. It alleged that the reason the dividend had not been paid was “because the payment thereof would have been unlawful.” It furthermore denied that “any such dividend as stated in plaintiff’s petition was in law or fact ever declared.” No objection by way or motion or demurrer was made that the answer was incomplete, or otherwise indefinite, or uncertain. Passing to plaintiff’s claim for salary as set up in the second count of the petition, we are of the opinion that error was committed in refusing defendant’s instructions Nos. 9 and 10. It does not appear upon what possible theory they could have been refused, since they were amply supported by evidence. If plaintiff failed to comply with his contract he surely ought not to recover on it. The judgment will be reversed and the cause remanded with directions to enter judgment for defendant on the first count and for a new trial on the second. Broaddus, J., concurs; Smith, P. J., not sitting.