Court Opinion

ID: 9794457
Source: CourtListenerOpinion
Date Created: 2023-08-31 03:05:59.236669+00
Date Added: 2024-06-11T08:13:54.641593
License: Public Domain

Grady, J.
(dissenting) — I am not in accord with the construction placed by the majority upon either subdivision (d) of Amended Article VI, or Rem. Rev. Stat., § 3823. I think the error becomes apparent when some of the history of The Big Bend Land Company is related.
The corporation was organized in 1901 to conduct a general real-estate business, to borrow and loan money, and to buy and sell merchandise. The capital stock consisted of $10,000, divided into 100 shares of common stock of the par value of $100 each. Later the capital stock was increased to $750,000. Lizzie L. Hay, now deceased, had advanced money to the corporation, which by 1921 reached a sum in excess of $500,000. M. E. Hay and E. T. Hay transferred their mercantile business to the corporation. The capital stock of the corporation was increased to $1,500,000, represented by 8500 shares of common stock of the par value of $100 a share and provision was made for the issuance of 6500 shares of preferred stock of the same par value. Lizzie L. Hay received in satisfaction of the indebtedness owing to her 5400 shares of the preferred stock. The articles of incorporation were amended as set forth in the majority opinion. In 1934, Amended Article VI was further amended by adding subdivision (e), which extended voting rights to preferred stockholders during default in the payment of dividends.
*524The Corporation acquired a large amount of real estate, but over the years which followed the adoption of Amended Article VI had no surplus profits out of which any dividends on either common or preferred stock could be declared. In 1946, a survey of the corporate financial structure was authorized. The board of trustees adopted a resolution providing for the reduction of all capital assets to cash as speedily as circumstances might permit in order that, at a subsequent date, the stockholders might consider and adopt a plan of liquidation, distribution, and dissolution of the corporation. Such a plan was later adopted, and respondents became the liquidating trustees. It developed that the net assets of the corporation were sufficient to redeem the preferred stock at par value, but if the preferred stockholders receive the promised dividends, assets instead of surplus profits will have to be used therefor. The result will be that the common stockholders will get no part of such assets. The liquidating trustees, being in doubt as to who was entitled to receive the assets upon liquidation after the redemption of the preferred stock, brought this action to secure a declaratory judgment.
The problem presented has caused the courts much difficulty, arising out of determining what are “accrued dividends,” “cumulative dividends,” “accumulated dividends,” or “unpaid dividends,” as those words are used in articles of incorporation. The courts do not seem to have had much trouble when questions arose in the ordinary course of business of a corporation, but differences of opinion arose when on liquidation preferred stockholders sought to have a preference in the distribution of assets to reimburse them, because in certain years the corporation had earned no net profits out of which dividends could be declared or paid.
One school of thought is of the view that a dividend can come into being and exist only by affirmative declaration of the trustees of a corporation, and then only if the corporation has on hand surplus net profits earned in the transaction of its business. If net profits, or a surplus, never existed, the right to a dividend never accrued, and that *525which never accrued cannot be demanded out of the capital account on liquidation. This was the view of the chancellor of Delaware in Penington v. Commonwealth Hotel Const. Corp., 17 Del. Ch. 188, 151 Atl. 228. One phase of Michael v. Cayey-Caguas Tobacco Co., 190 App. Div. 618, 180 N. Y. Supp. 532, is to the same effect.
Another school of thought is that dividends, if not regularly paid out of available earnings, may be amassed or stored up, whether earned or not earned, at regular dividend dates, and, in the absence of a controlling statute, may be paid out of assets when the corporation is liquidated if the articles of incorporation so provide. This idea found expression in Penington v. Commonwealth Hotel Const. Corp., 17 Del. Ch. 394, 155 Atl. 514, 75 A. L. R. 1136. Three judges of the court disagreed with the chancellor. Two-believed his views were correct and consistent with the better and more logical reasoning. The cases cited in the majority opinion follow the reasoning of the three judges.
Whatever may be said as to the soundness of one view or the other, it must be observed that in none of the cases relied upon by the majority were the courts guided by any statute like Rem. Rev. Stat., § 3823, with its two-fold aspect. The Pennsylvania case cited makes reference to a statute which authorizes the directors of a corporation to declare dividends out of net profits, but such statute contained no inhibition against division of capital assets among stockholders in lieu of unpaid guaranteed dividends.
It seems to me apparent that whoever prepared subdivisions (a), (b), (c), and (d) of the amended articles of incorporation was familiar with the rules of law relating to the rights of holders of common and preferred stock and desired to follow Rem. Rev. Stat., § 3823, the applicable part of which reads as follows:
. “It shall not be lawful for the trustees to make any dividend except from the net profits arising from the business of the corporation, nor divide, withdraw, or in any way pay to the stockholders, or any of them, any part of the capital stock of the company, . . . Provided' that this section shall not be construed to prevent a division and distribution *526of the capital stock of the company which shall remain after the payment of all its debts upon the dissolution of the corporation or the expiration of its charter: . .
The statute contains two inhibitions: (1). against making any dividend, except from net profits arising from the business; (2) against any division, withdrawal, or payment to the stockholders of any part of the capital stock of the corporation. By the proviso, the capital stock remaining after debts are paid may be divided among the stockholders when the corporation is dissolved or its charter expires. The subjects of the two inhibitions are wholly unrelated. The first relates to dividends and forbids the making of any, except from net profits. No dividend can be made out of assets, and any article of incorporation construed as so providing would be contrary to the statute and void. The second relates to the assets of the corporation and forbids any division thereof, except on dissolution or expiration of the charter.
Making dividends and dividing assets are two different things. A dividend can never be made unless there are in existence net or surplus profits derived out of the current business done by the corporation. The capital stock or assets of The Big Bend Land Company belong to the common stockholders. The preferred stockholders had either loaned money to the corporation and received in payment shares of preferred stock or had become purchasers of such stock. The common stockholders could have received dividends as and when they were made by the trustees out of net profits and secondary to preferred stockholders. The latter could have received dividends from the same source, but on an annual percentage basis.
If at the end of any year net profits had not been earned out of which the dividends could have been made in whole or in part, then the preferred stockholder had a preference whereby he would be entitled to such dividends as soon as there were net profits available. In the case of the common stockholder, he would not necessarily be paid a dividend, even though there might be available net profits therefor, but the preferred stockholder became entitled to dividends *527annually if there were net profits out of which they could be made. If such dividends were made, but were not paid to the stockholder, or if he chose to leave them with the corporation, he would have a preference right over common stockholders later to have them paid to him. Such dividends would be property of the corporation, and when ultimately paid would not be as dividends, but as corporate funds. Such payment would not be a violation of Rem. Rev. Stat., § 3823. Dividends as such are not made when a corporation is liquidated and dissolved. They are only made while it is doing business.
It seems to me that the purpose of subdivision (d), when considered along with all • of the other subdivisions of Amended Article VI and Rem. Rev. Stat., § 3823, was to provide that, when the corporation was liquidated and dissolved, the. preferred stockholders were ¡entitled to have a redemption made of their stock and to receive any . dividends which had at any time been made by the trustees out of net profits but had not been paid to them, before any should be paid to or any assets distributed among the holders of the common stock. I can find nothing in subdivision (d) that authorizes the making of dividends out of assets upon liquidation and dissolution.
In Jorquson v. Apex Gold Mines Co., 74 Wash. 243, 133 Pac. 465, Rossi v. Rex Consolidated Mining Co., 108 Wash. 296, 183 Pac. 120, and Austin v. Wright, 156 Wash. 24, 286 Pac. 48, the concept' of dividends, both with reference to a corporation that was a going concern and one being dissolved, was considered. These cases clearly indicate that it is the policy of Rem. Rev. Stat., § 3823, that a dividend can never be derived out of assets, but its only source is net profits; and that when a corporation is dissolved, the only thing there is to divide among stockholders is assets and not net profits. The idea of making dividends is wholly dissociated from dividing the assets of the corporation among stockholders.
I think a reading of the whole of Amended Article VI in connection with Rem. Rev. Stat., § 3823, must convince one *528that the dividends referred to in subdivision (d) can mean only those that may have been once lawfully made by the board of trustees out of surplus profits, but which had not been paid to the preferred stockholders. If we do otherwise, we must accuse the corporation of adopting a tricky device to favor preferred stockholders and deprive the common stockholders of their property. Granting that if in any year or years no net profits are earned, dividends have nevertheless “accrued” and during successive years have “accumulated” and may be paid at some future time, they can only be paid out of surplus profits and not out of capital. If the corporation is liquidated and does not have on hand any net or surplus profits, then there is nothing out of which the “dividends” can be paid.. This was the view of the court in Michael v. Cayey-Caguas Tobacco Co., 190 App. Div. 618, 180 N. Y. Supp. 532, especially when fortified by a statute the same as Rem. Rev. Stat., § 3823. The court said:
“Since no profits have been made, and so no dividends were or could have been declared, it is difficult to understand how eight per centum annual dividends could have accumulated during these intervening years to be now paid out of ‘surplus assets and funds’ or ‘surplus profits,’ to wit, the amount remaining after payment of debts and repayment of capital. No such sum exists. The amount now on hand is not profits, but is capital." . . . There being no accumulated profits, when the preferred stockholders received the full par value of their stock they had received all that they were entitled to, in view of the fact that the amount remaining in the hands of the company was not sufficient to pay the par value of the common stock.”
The court also arrived at the same conclusion in the absence of a statute, following some English cases. It is this part of the decision that has been rejected by some courts, as stated in the majority opinion. No court, so far as I have been able to find, has disagreed with the opinion of the New York court in its application of the statute.
The state of Wisconsin has met the problem by enacting a statute of the same import as Rem. Rev. Stat., § 3823, with reference to confining dividends to net profits and not using assets to pay “accumulated” dividends, but it is more specific *529in its wording, in that there is an express limitation to profits in the payment of dividends upon liquidation. In Hull v. Pfister & Vogel Leather Co., 235 Wis. 653, 294 N. W. 18, it was held the statute was a part of the contract between the corporation and the stockholders, and the court refused to permit the corporation on liquidation to pay accumulated dividends out of assets. It is proper to note that, when the corporation adopted the article relating to liquidation, it contained a specific provision that preferred stockholders should be first paid the par value of their stock
. . and in addition thereto, in case that there shall then be and to the extent that there shall then be any profits of the corporation applicable to dividends on preferred stock, an amount equal to five per centum (5%) upon the par value of said stock, plus the amount of such dividends then accrued and unpaid, but they shall not be entitled to any further or other participation in the distribution of assets and/or profits.”
If we consider our statute as a part of Amended Article VI and the theory of our cases above cited, the same conclusion should be reached as was done by the Wisconsin court.
From the time preferred stock was issued in 1921 until liquidation in 1949, the corporation earned no net profits and could declare no dividends. It would be a gross injustice to the holders of common stock to now take their property from them and give it to the preferred stockholders to satisfy a fictional claim that accrued dividends had accumulated and were owing and unpaid.
We should not be led astray by any imposing array of decisions from other states. Those courts were dealing with contractual provisions in the form of an article of incorporation and held the parties intended deficit payments should be made to preferred stockholders out of assets on liquidation of the corporation. The articles of incorporation under consideration were not promulgated in the light of any statute like ours, and the courts were not furnished with such a guide. I have no doubt if such statutes had existed the courts would have interpreted the articles of incorporation before them as did the New York court.
*530I think, the judgment should be reversed and a declaratory . judgment entered to. the effect that, after the redemption of the preferred stock, the remaining assets should be divided among the common stockholders.
Schwellenbach, C. J., Robinson, and Mallery, JJ., concur with Grady, J.