Court Opinion

ID: 3492542
Source: CourtListenerOpinion
Date Created: 2016-07-05 22:00:46.962664+00
Date Added: 2024-06-11T14:05:08.697245
License: Public Domain

I am not in accord with the Chief Justice in holding that the act of the directors in declaring a cash dividend in September, 1923, made a case for the jury as to the defendants *Page 566 
Wilmarth and Noorthoek. The record does not support his assumption that they were dummy directors, and, therefore, his criticism of directors who lend their influence, but who do not direct, has no application.
The declaration charged a conspiracy to defraud against all of the directors. In his proofs the plaintiff failed to establish a conspiracy at least as to these two defendants. Having failed in this, Wilmarth and Noorthoek cannot be held liable for any wrongful acts except their own. If they are liable for consenting to the payment of a cash dividend, it is because their conduct was so grossly negligent as to amount to fraud, or because they did not use reasonable diligence and care to ascertain whether there was a surplus out of which the dividend could be paid.
The resolution declaring the payment of a cash dividend reads as follows:
"On motion of Mr. Day, seconded by Mr. Noorthoek, it was resolved that a dividend of twenty-five cents per share on the common capital stock of the National Hardwood Company, be declared payable to the stockholders of record September 29, 1923, same being payable on October 1, 1923, out of the surplus of said company. Said resolution was carried by the unanimous vote of all directors present."
Mr. Noorthoek, as the resolution shows, was present at the meeting and the testimony is that he voted for the dividend after being assured that there was a surplus out of which to pay it. Mr. Wilmarth was not able to attend the meeting because of sickness, but he wrote a letter advising against the payment of a dividend. However, he subsequently confirmed the resolution by signing the minutes after it had been represented to him that there was a surplus.
If there was in fact a surplus, it will not be necessary to consider what diligence and care the defendants Wilmarth and Noorthoek used in ascertaining the *Page 567 
truth of the representations made to them in respect thereto. That there was a surplus is not disputed in the record. It is true that it was not created from the earnings but from stock donated to the company by directors Hoffman, Day, and Jacobson. The company realized $270,979.48 from the sale of this stock. The total dividend declared amounted to $20,825. The exact amount of the operating losses at the time this dividend was declared does not appear in the record, but it does appear that the donated stock was sufficient to pay all of the operating losses and the $20,825 dividend. Counsel for the plaintiff claim that the law of Delaware, under which this company was organized, authorizes the payment of dividends only from the accumulated profits in excess of the capital stock paid in, and that the corporation and its directors are forbidden to declare dividends except from such accumulated profits. Counsel for the defendants claim that it is immaterial where the surplus is obtained so long as it exceeds the capital and debts, and if it does it constitutes profits out of which a dividend may be paid. In this case, between these parties and on this issue, the question is not whether the dividend was lawfully declared, but whether it was the result of fraud or negligence. And on this question the important and controlling fact is that after deducting the liabilities and losses and the capital stock, there was a sufficient amount remaining with which to pay the dividend. So that the payment of the dividend did not diminish the assets of the company below the capital stock. It probably was poor business judgment for the directors to declare a dividend at a time when the company was operating at a loss, but they are not liable for that alone. They are liable only for fraud or negligence. And though there were operation losses, if there was a surplus above the capital and the debts, the company would not be insolvent *Page 568 
and there would be no fraud or negligence in declaring a dividend payable out of the surplus. The facts in regard to the surplus are established by the plaintiff's audit of the company's books. They are not in dispute. The facts in regard to the dividend are matters of record concerning which there is no dispute. There was nothing for the jury to find, and, therefore, the court was right in holding the question one of law. The defendants Wilmarth and Noorthoek were not guilty of any wrong or negligence in consenting to the dividend.
Apart from the matter of the dividend, there is nothing in the record tending to show any actionable wrongful act of the defendant Wilmarth. As to him the judgment should be affirmed.
There is testimony that Noorthoek represented to the plaintiff that the company was making a net profit of $10,000 per month. This Mr. Noorthoek denied. It was a question for the jury.
In view of the testimony, whether the plaintiff relied on the alleged representations was also a question for the jury.
As to Mr. Wilmarth the judgment should be affirmed. As to the other defendants it should be reversed, with costs to the plaintiff. *Page 569