Court Opinion

ID: 6835410
Source: CourtListenerOpinion
Date Created: 2022-07-23 20:03:56.019739+00
Date Added: 2024-06-11T16:04:40.974238
License: Public Domain

DIETKICH, Circuit Judge
(dissenting). I recognize that, as stated by tbe majority, generally a writing is not conclusive against one who is not a party thereto, and that in a strict sense tbe principle of estoppel is inapplicable. But is that tbe real question here? Admittedly tbe declaration of dividend was effective as to stockholders, for in their brief counsel for tbe corporation say: “We concede that tbe resolution of January 8, 1917, was in terms a legal and effective declaration of dividend.” And again: “In an action by the stockholder against bis corporation to recover a dividend, we concede that tbe vital question would be whether the form (italics mine) of tbe resolution bad tbe quality and effect of a valid dividend declaration. * * * In sueb instances it is not to be supposed that the directors could be beard to say that tbe plain language of their resolution was not intended to mean what it said.”
*513That being trae, to what possible end the widest inquiry back of the declaration? Being effective to create a dividend, indefeasible as to stockholders, thus constituting a corporate obligation of indebtedness enforceable at law, it was of necessity equally effective to reduce capital investment, for admittedly, in computing capital, debts are deductible. Suppose that by deed executed in due form the corporation had conveyed to its stockholders specific real estate theretofore a part of its capital investment; could it, while conceding the effectiveness and indefeasibility of the instrument as to the grantees, successfully contend that, because of some secret intention or understanding inconsistent therewith, which it could not assert as against them, the property continued to be a part of its capital investment? By hypothesis of validity as to stockholders, the deed in one case and the declaration of dividend in the other inevitably operates to establish the property status.
In the English & Mersick Co. Case (C. C. A.) 7 F.(2d) 57, cited in the majority opinion, the court said: “Mr. Cook in his authoritative work on corporations (7th Ed.) vol. 2, p. 1579, § 451, states that, ‘when a dividend out of the earnings of a company has been regularly declared and-is due, it becomes immediately the individual property of the stockholder. There is at once a severance, for the use and benefit of the members of the corporation, of so much of the accumulated earnings as are declared; and the dividend thereafter exists as a separate fund, distinct from the capital stock or surplus profits. It then becomes the absolute property of the stockholders.’ There is no doubt about the correctness of this statement of the law. It is abundantly sustained by the authorities, many of which are cited by the learned author.”
But in the other aspect of the case, assuming that it was competent for the court to go back of the resolution, I am constrained to the same conclusion. Just what significance is attached by the court to the term “technical,” as used in the findings, I do not understand. In a sense all minute and book entries are technical. Certainly here they were neither fictitious nor sham; and there is no contention that they were entered in bad faith or as a pretense. Nor am I able to comprehend how, under the evidence, it can be said the interest payments were unauthorized.
As in effect admitted, the facts may thus be stated: The corporation had actually earned a profit of over $290,000, which legally was subject to the will of the directors in respect of dividends. The directors, men of intelligence and business experience, duly passed a resolution which, it is conceded, “was m terms a legal and effective declaration of dividend,” covering $288,000 of such profit. Being payable immediately, but not so paid, the dividend, together with interest thereon, was appropriately credited to the individual accounts of stockholders.
Nothing more appears to have been done until May 21st. It may be that the intervening historical event affected the business of the corporation, and particularly its capital requirements. But, however that may be, the May resolution neither vacates nor qualifies the resolution of January 8th, but in effect recognizes its validity and affirms it. Whatever may be the reasons, the directors were then of the opinion that more capital would be required than it was apparently thought to be necessary in January. Accordingly the provision for $200,000 to be raised by subscription, and this was forthwith procured by inducing the stockholders to contribute a ratable part of the dividend tacitly recognized as having been vested in them by the January resolution. The other $88,000 covered by the January resolution was at once paid to them in cash, together with interest upon the entire $288,000 from January 8th to May 21st. If at that time the January resolution was not understood to be what it purports to be, or was for any reason thought to be ineffective, I can conceive of no valid reason for the payment of interest, or, indeed, for the second resolution at all, for upon that hypothesis the entire $288,000 constituted invested capital, and the obvious course would have been simply to declare a dividend of $88,000 and leave the $200,000 where it was.
As it turns out, under the theory of the defendant in error, the $88,000 was at no time declared a dividend, though it was actually paid out as such. And as bearing both upon the so-called equities and the self-serving statement made by the two directors giving testimony as to the mental attitude, not only of themselves, but of their associates, in January, that they did not understand the legal effect of the dividend resolution, it is to be noted that, if it was what it appears to be, one of its immediate legal effects was to create a corporate obligation to pay interest, and the interest so accruing to them they not only accepted and still retain, but in the following year, in making up the company’s tax return, the amount thereof was deducted as interest paid.
I am unable to see the materiality of the fact that on May 21st the $200,000 was not first paid in cash to the stockholders in satisfaction of the dividend, and then passed back *514by the stockholders to pay their subscriptions. The underlying obligations are none the less real, because a bank by mere book entries applies a credit balance of a depositor's account to the satisfaction of his overdue note.
So, also, the fact that on January 8th the corporation was not in cash sufficient to cover the dividend is without substantial probative value. It was its right to borrow the funds from a bank, or, if it so elected, from the stockholders. The latter course it pursued, and whether it paid interest to the bank or to the stockholders is immaterial.
The amount of the dividend may in the abstract seem large; but it loses significance when it is borne in mind that the daily cash receipts of the corporation ranged from $30,-000 to $60,000. Taking the lowest figure, the obligations could have been liquidated out of 10 days’ current income.
As I read the record, all the substantial facts are consistent with the theory that the January resolution is what it purports to be, and are at variance with the belated and self-serving protestations of a different understanding.