Case Name: Bankers Trust Company, as Substituted Trustee of the Trusts Created by the Will of William Henry White, Deceased, Which Sues on Its Own Behalf and for the Benefit of All Persons Similarly Situated with Respect to the Stock of R. E. Dietz Company, Appellant, v. R. E. Dietz Company, Frederick Dietz, Individually and as One of the Executors of, and as One of the Surviving Trustees of the Trusts Created by the Last Will and Testament of Robert E. Dietz, Deceased, and Others, Respondents, Impleaded with Samuel McMillan, Individually and as One of the Executors of and Surviving Trustees of the Trusts Created by the Last Will and Testament of Robert E. Dietz, Deceased, and Howard J. Dietz, Defendants
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1913-07-10
Citations: 157 A.D. 594
Docket Number: 
Parties: Bankers Trust Company, as Substituted Trustee of the Trusts Created by the Will of William Henry White, Deceased, Which Sues on Its Own Behalf and for the Benefit of All Persons Similarly Situated with Respect to the Stock of R. E. Dietz Company, Appellant, v. R. E. Dietz Company, Frederick Dietz, Individually and as One of the Executors of, and as One of the Surviving Trustees of the Trusts Created by the Last Will and Testament of Robert E. Dietz, Deceased, and Others, Respondents, Impleaded with Samuel McMillan, Individually and as One of the Executors of and Surviving Trustees of the Trusts Created by the Last Will and Testament of Robert E. Dietz, Deceased, and Howard J. Dietz, Defendants.
Judges: 
Reporter: Appellate Division Reports
Volume: 157
Pages: 594–601

Head Matter:
Bankers Trust Company, as Substituted Trustee of the Trusts Created by the Will of William Henry White, Deceased, Which Sues on Its Own Behalf and for the Benefit of All Persons Similarly Situated with Respect to the Stock of R. E. Dietz Company, Appellant, v. R. E. Dietz Company, Frederick Dietz, Individually and as One of the Executors of, and as One of the Surviving Trustees of the Trusts Created by the Last Will and Testament of Robert E. Dietz, Deceased, and Others, Respondents, Impleaded with Samuel McMillan, Individually and as One of the Executors of and Surviving Trustees of the Trusts Created by the Last Will and Testament of Robert E. Dietz, Deceased, and Howard J. Dietz, Defendants.
First Department,
July 10, 1913.
Corporation —representative action by stockholder against directors — conspiracy to impair value of stock — scrip dividend — complaint — interest on scrip dividend.
Where in a representative action by a stockholder against the directors of a corporation it was alleged that the defendants had conspired to impair and destroy the value of stock held-by the plaintiff as trustee under a will; that they had declared a dividend of $340,000, payable to the stockholders of the company, for which debentures were issued, without consideration, which were not intended to be paid; that the corporation did not have surplus profits available for the payment of dividends in the smn of $340,000 or any sum in excess of $50,000, and that on the day of the declaration of the dividend all the profits of the corporation were invested in land, machinery, materials and appliances used in its business, the complaint was defective in that it contained no allegation that the corporation had not earned profits sufficient to justify the payment of said dividend.
Such dividend constituted a scrip dividend .and interest was payable thereon from the time of its issue.
Ingraham, P. J., dissented, with opinion.
Appeal by the plaintiff, the Bankers Trust Company, as substituted trustee, etc., from an interlocutory judgment of the Supreme Court in favor of certain of the defendants, entered in the office of the clerk of the county of New York on the 10th day of February, 1913, upon the decision of the court, rendered after a trial at the New York Special Term, sustaining the said defendants’ demurrers to the amended complaint.
Joseph M. Hartfield, for the appellant.
William Travers Jerome, for the respondents.

Opinion:
Dowling, J.:
This action is a representative one, based on the following alleged facts: The defendant R. E. Dietz Company, a New York corporation, has an outstanding capital stock of 1,000 shares of a par value of $100 each. Robert E. Dietz, at the time of his death, September, 1897, owned 600 shares of this stock, the defendant Frederick Dietz owned 250 shares, and John E. Dietz 150 shares. The two latter were sons of Robert E. Dietz, and the corporation was practically a copartnership, the three owning its entire stock. By the will of Robert E. Dietz, Frederick Dietz, Samuel McMillan and William Henry White were constituted executors and trustees, and his 600 shares of stock were left to them in trust for the lifetime of Anna Dietz, who died in August, 1911. William Henry White married Mary Augusta Dietz, a daughter of Robert E. Dietz, and she was the owner of a one-fifth vested remainder interest in said shares of stock, which thereafter vested in her husband. She died, and White thereafter died on July 3, 1904, seven years before the death of Robert E. Dietz's widow. It is alleged that the individual defendants, Frederick Dietz, John E. Dietz and Frank H. Clement, finding that by the will of William Henry White a considerable portion of his estate, including said stock, would go to others than members of the Dietz family, formed a conspiracy for the purpose of impairing, reducing and destroying the value of said stock owned by White, and passing to the trustee under his will. This conspiracy is claimed to have been effectuated by the passing of a resolution by the board of directors of the company on September 16, 1904, whereby a dividend of 340 per cent was declared payable to the stockholders of the company. It is alleged in the complaint that said dividend was never intended in fact to be paid, but debentures or certificates of indebtedness to the full extent were issued, $204,000 in par value being allotted to Anna Dietz, the widow, representing the 60 per cent of stock belonging to her husband's estate from which she had a life income, $85,000 being issued to Frederick Dietz and $51,000 to John E. Dietz, representing their proportion of said debenture issue based upon their stock holdings. The 16th paragraph of the complaint then avers as follows:
"Plaintiff alleges that the said debentures were and all of them were issued without any consideration accruing to the said corporation therefor, and that said debentures are not the legal, valid obligations of the defendant E. E. Dietz Company. That on September 16, 1904, the defendant E. E. Dietz Company did not have surplus profits of the Company available for the payment of dividends, the sum of $340,000, or any such sum, or any sum in excess of the sum of $50,000. That on'the said date all of the profits of the E. E. Dietz Co. which had been earned by it were invested in land, machinery, materials and appliances used in its manufacturing business, and the said corporation could not have continued its business if on said date any such sums had been withdrawn from the treasury of said Company for distribution to stockholders."
It is then alleged that these certificates were issued without consideration, and that they would leave little or no sum available for the payment of dividends upon the capital stock of the company, and would cause the E. E. Dietz Company to be no longer a company owing practically no money, but a corporation heavily in debt, and would seriously injure and affect the conduct of said company. The second and third causes of action are in effect the same as the first cause of action, from which quotation has heretofore been made.
The infirmity of this complaint, as I view it, is that there is absolutely no allegation that the company had not earned profits sufficient to justify the payment of said dividend. On the contrary, the pleader has been careful to limit himself to an allegation that the company did not have surplus profits available for the payment of dividends in the sum of $340,000. Not only does this involve a conclusion, but it specifically appears as well that profits have been earned and. invested in other property, the value of which is not given nor is it alleged to be less than the aggregate of the debentures issued. There can be no doubt of the right of the corporation to issue a scrip dividend, which is thus defined: "A scrip dividend is a dividend of certificates giving the holder certain rights which are
specified in the certificate itself. These dividends are usually declared when the company has profits which are not in the shape of money, but are in other forms of property, and the company wishes to anticipate the time when the properly may be sold for cash, and the cash distributed by a money dividend. The certificate sometimes entitles the holder to a sum of money payable with interest at a certain time after date, or at the option of the company, or when the company shall have accumulated sufficient surplus to pay the certificates in full." (Cook Corp. [6th ed.] § 535.) And in section 546 the same writer says: " When the company has used profits for improvements it may lawfully borrow an equivalent sum of money for the purpose of a dividend."
The validity of scrip dividends was upheld in Matter of Robinson's Trust (218 Penn. St. 481), wherein it was also held that such dividends when declared belonged under the will of the testator to the life tenant and not to the remaindermen. So in Bailey v. Railroad Company(89 U. S. [22 Wall.] 604)theval idity was upheld of a scrip dividend to the extent of eighty per cent of the individual holdings of capital stock, payable out of future earnings, convertible at the option of the company into a stock dividend of the same amount whenever the railroad company was authorized to increase its capital stock to an amount sufficient for such conversion. In Billingham v. Gleason Mfg. Co. (101 App. Div. 476; affd., 185 N. Y. 571) the right of a corporation was upheld to issue a scrip dividend which constituted an indebtedness of the company to the stockholders. As the court said: " That constituted an indebtedness of the company to Billingham. It was so much set apart and reserved for him as undivided earnings. His share was ascertained and his right to it was fixed. It was a divided share of past earnings, and, as we think, became a severed indebtedness of the company, for nothing is better understood than that a dividend when declared is a debt due absolutely to the stockholders. It was an obligation perfect and complete in its character, although payment was postponed to a future time." I think, therefore, that this complaint as to each of the causes of action therein attempted to be set forth was fatally defective, as it contains no appropriate allegation that the undivided profits of the company did not amount to as much as the total sum for which the scrip dividend was authorized. Furthermore, under the decisions quoted, interest became payable upon the amount of the scrip from the time of its issue, and, therefore,' the fact that the certificate contains a provision for the payment of such interest is not an appropriate subject for complaint. It is apparent that where the corporation, instead of disposing of the property in which the profits have been invested and then paying the dividends from the proceeds, prefers to retain the property and postpone payment to the stockholders, it is reserving the property from which it is fair to assume it earns a return sufficient to discharge in whole or in part the interest upon its dividend obligation. Moreover, it had the right, if it so elected, to borrow the money with which to pay dividends when it had invested the profits in improvements at least equaling in value the dividends declared, so that interest in that event would equally be a charge before further dividends could be declared as of earnings.
The judgment appealed from should, therefore, be affirmed, with costs, with leave to the plaintiff upon payment thereof to serve an amended complaint.
Laughlin, Scott and Hotchkiss, JJ., concurred; Ingraham, P. J., dissented.