Court Opinion

ID: 9636472
Source: CourtListenerOpinion
Date Created: 2023-08-22 14:30:14.889687+00
Date Added: 2024-06-11T18:09:46.361141
License: Public Domain

L. HAND, Circuit Judge
(dissenting). The relevant clause of the charter gives the plaintiffs “preferred dividends in each fiscal year up to the amount of five per cent.,” and the case concerns only the earnings of a current year, not the distribution of accumulations carried over from earlier years. There wore undeclared earnings in such years, but they are now1 in the form of track, equipment, and working capital, and in that form they will remain, for the directors do not mean to distribute any of the working capital, obviously the only part which they could. The words, “up to tho amount of five per cent.,” were prima facie used in limitation as well as in grant, and tho question is whether the circumstances require us to import an exception. The occasion is that tho earlier earnings could have been declared, had not the directors decided that the corporation needed the money for its general operations, a decision, which nobody challenges.
If "the directors proposed to reduce the working capital accumulated out of the past earnings, they would probably be obliged to declare as preferred dividends tho amount so withdrawn. That was the situation in Bassett v. U. S. Cast Iron, etc., Co., 75 N. J. Eq. 539, 73 A. 514, and also in Collins v. Portland, etc., Co., 12 F.(2d) 671 (C. C. A. 9), 48 A. L. R. 73, as I understand the facts, although the report is not altogether clear. But in the case at bar the directors still need the working capital which they accumulated out of earlier earnings; the only way in which it can be considered to be distributed is by gratuitously marshaling the proposed common dividend against earlier earnings and using current earnings to make up the deficit so created. That I submit would be legerdemain.
Moreover, since there is no rational distinction between working capital and track and equipment, the result of our decision must be to establish a deferred credit of $16,-000,000, which must he declared out of the earnings of later years before tho common shares can get anything whatever. There is not the slightest reason to suppose that the preferred shares would have claimed anything of the sort, or that the common, shares *268would have yielded it if they had. Apparently in Day v. U. S. Cast Iron, etc., Co., 95 N. J. Eq. 389, 123 A. 546, the working capital was indeed not reduced, and the preferred shares were awarded some part of the earlier earnings, though even this is not entirely clear. But the case was decided by an evenly divided court, in which six out of the nine justices voted to deny the claim, and where ■every one supposed that the New Jersey statute was important, if not determinative. The ease is scarcely authority for the position here taken.
Nor are those eases authority where the charter makes the preferred dividends depend only upon earnings. Wood v. Lary, 47 Hun (N. Y.) 550; Burk v. Ottawa, etc., Co., 87 Kan. 6,123 P. 857, Ann. Cas. 1913D, 772. The directors have then m choice, and must declare the dividends in the year in which the earnings are made, or as soon as the shareholders demand them. Such cases are outside the general rule laid down in N. Y., L. E. & W. R. Co. v. Nickals, 119 U. S. 296, 7 S. Ct. 209, 30 L. Ed. 363. Again, the majority shareholders may have abused their powers, as in Star Pub. Co. v. Ball, 192 Ind. 158, 134 N. E. 285, where, moreover, the discussion of the preferred shareholders’ rights to a larger dividend than that allowed by the lower court gives as much comfort to the appellees here as to the appellants. In the ease at bar, both sides agree that the directors must declare the earnings as dividends before the shareholders can become entitled to them, .and that their judgment was honestly exercised when they declined to declare them in -the past.
What is there, then, .which should induce us to ignore the limitation of the charter, that out of the earnings of any year thé preferred dividends shall be limited to 5 per cent.? Nothing but the fact that in past years it was advisable, in the company’s interest, to retain what, except for those interests, should have been 'declared. To such contingencies preferred shareholders are as subject as common; they accept them in the character of their investment. We must say that in some way the mere existence of earnings gives them a right, not immediate, • indeed — for that would be too flagrant a disregard of the language — but as a kind of lien on subsequent earnings when these can be spared. That might be a good sort of investment, but how have they stipulated for it? They have agreed not to claim earnings as such and to limit their rights upon the earnings of any given year. I can see no basis for the interpolation of this added right; it seems to me to violate the basic agreement. None of 'the considerations which apply to deferred dividends touch it at all; it is a mere gratuity.
The only decision in point, except Day v. U. S. Cast Iron, etc., Co., is Norwich Water Co. v. So. Ry. Co., 11 Va. Law. Reg. (N. S.) 203, in which, however, though the discussion bears out the view I take, the charter was such as of itself to compel the result. On the other hand, Continental Ins. Co. v. U. S., 259 U. S. 156, 42 S. Ct. 540, 66 L. Ed. 871, is not so foreign to the case as my brothers think. If prior earnings retain.no earmarks upon dissolution, though they are then a part of the very funds distributed, it would seem that they should not create a lien upon subsequent earnings, which are no part of them, and which, indeed, result only in small measure from their use as capital.
Nor do I understand how any equities can bo said to exist, except from some implied intent for which there is no warrant. The notion that preferred shareholders are weaker in bargaining power may or may not be true; I know too little of the facts. Prima facie they must be taken at their word, like other people, and, if any tenderness is due them, it should follow upon an inquiry which courts have no power to make. I agree that directors, who generally hold common shares, may be induced to starve the preferred shares in the hope of greater earnings from, an increased capital, eventually taking form in greater common dividends, and though that is a somewhat remote motive, it may be real enough. But preferred shareholders, as well as common, accept the situation; the law has long advised them that their rights depend upon the judgment of men subject to just that possible bias; the language chosen implies that their action shall be a condition upon any dividends. Why we should distort that language against the possibility of a dereliction of duty, for which, though hard to prove, the law gives redress, I do not see. Courts must not be blind, but the correction of possible injustices may come at too high a price. Words are illusive enough at best, but, when all is said, they are the only means of communication we have. On the loyalty of their interpretation more in the end depends than on our power to right such wrongs as results from their inconsiderate use.