Case Name: MERZ v. INTERIOR CONDUIT & INSULATION CO. et al.
Court: New York Supreme Court, General Term
Jurisdiction: New York
Decision Date: 1895-06-14
Citations: 34 N.Y.S. 215
Docket Number: 
Parties: MERZ v. INTERIOR CONDUIT & INSULATION CO. et al.
Judges: 
Reporter: West's New York Supplement
Volume: 34
Pages: 215–224

Head Matter:
(87 Hun, 430.)
MERZ v. INTERIOR CONDUIT & INSULATION CO. et al.
(Supreme Court, General Term, First Department.
June 14, 1895.)
Corporations—Bonds—Payment of Scrip Dividends.
Laws 1892, c. 688 (Stock Corporation Law), § 42, which provides that n@ corporation shall issue bonds “except for money, labor done, or property actually received for the use and lawful purposes of such corporation.” does not authorize a corporation to issue bonds to pay scrip dividends. O’Brien, J., dissenting.
Appeal from special term, New York county.
Action by Franz Merz, suing on behalf of himself and other stockholders of the Interior Conduit & Insulation Company, against said Interior Conduit & Insulation Company and others. From an order denying in part a motion to continue an injunction, both parties appeal.
Reversed.
Argued before VAN BRUNT, P. J., and O’BRIEN and FOL-LET, JJ.
A. J. Dittenhoefer and David Gerber, for plaintiff.
Eugene H. Lewis, for defendants.

Opinion:
FOLLETT, J.
Stripped of unnecessary words, the scheme of the corporation is to issue $500,000 of its bonds, payable in gold coin April 1,1925, with interest at 6 per cent, per annum, payable on the 1st days of April and October in each year, which are not to be issued "for money, labor done, or property actually received for the use and lawful purposes of the corporation," but for the following purposes:
12% per cent of the bonds to he devoted to paying scrip............$ 62,506
50 per cent of bonds to reduction of stock of corporation.......... 250,006
37% per cent, of bonds for cash................................... 187,500
$500,000
In June, 1894, the directors of the corporation declared a scrip dividend of 5 per cent, on its capital stock of $1,250,000, the total amount of which dividend being $62,500. At the same time it declared a scrip dividend of 5 per cent on $500,000 on capital stock not then issued, but which it is alleged ought to have been issued to the Johnson Standardizing Company. This scrip, amounting to $12,500, was turned over to the latter company. The total amount of dividend scrip outstanding is $75,000, besides interest, $62,506 of which is to be paid by exchanging it for the bonds to be issued.
Section 23 of the stock corporation law provides:
"The directors of a stock corporation shall not make dividends, except from the surplus profits arising from the business of such corporation; nor divide, withdraw or in any way pay to the stockholders, or any of them, any part of the capital of such corporation or reduce its capital stock, except as authorized by law."
There is no authority for making a scrip dividend in one year and in the succeeding year issuing bonds to. pay such dividend in whole or in part. This seems to me to be a plain violation of the statute. If this is sanctioned, the entire capital stock of a corporation can be wiped out by the declaration of dividends and subsequently issuing bonds wherewith to pay the dividends. I fail to find any provision in the statute authorizing the capital stock of the corporation to be reduced by the substitution of bonds therefor. The forty-second section of the stock corporation law provides:
' "No corporation shall issue either stock or bonds except for money, labor done or property actually received for the use and lawful purposes of such corporations. No stock shall be issued for less than its par value. No such bonds shall be issued for less than the fair market value thereof."
Under this section the corporation cannot issue bonds to pay scrip dividends, or for the purpose of reducing its capital stock. This is in no sense a scheme for. the reduction of the capital stock of the corporation, and for a division among the shareholders of the property of the corporation in excess of the amount of the capital stock as reduced, and the cases sanctioning such reductions and distributions are not in point. Whether the proposed scheme will advance the interests of the corporation .or not is a question with which we have nothing to do. The statute prescribes the purposes for which stock and bonds may be issued, and every stockholder has the right to compel the directors to observe the statute. That part of the order which vacated the original injunction should be reversed, and the original order restored, with costs to the plaintiff.
VAN BRUNT, P. J., concurs.