Court Opinion

ID: 3610981
Source: CourtListenerOpinion
Date Created: 2016-07-05 23:55:10.596768+00
Date Added: 2024-06-11T14:24:09.444163
License: Public Domain

Upon a motion for a reargument in this and other similar cases decided with it, the following opinion was handed down.
The motion for a reargument in these cases is founded upon the ground that the appellant's counsel omitted to discuss the question as to the legality of allowing interest *Page 187 
upon the dividends, and that several decisions and authorities upon that question were not cited upon the brief of the appellant's counsel and the attention of the court was not drawn to the same. The position of the defendant's counsel is, that the ten per cent dividends which were to be paid by the contract and certificate upon the new stock issued were in the nature of interest and given as an inducement to the parties subscribing to advance this necessary amount of money to pay certain obligations of the corporation in a period of emergency and that the allowance of interest thereon in point of fact would be interest upon interest, or compound interest which is unauthorized by law, and which is never allowed except in case of an express agreement to that effect. The general rule is well established that compound interest cannot be recovered by law without an agreement to pay the same entered into after it has become due. (State ofConnecticut v. Jackson, 1 Johns. Ch. 13; Ackerman v.Emmott, 4 Barb. 649.)
Under ordinary circumstances interest is not recoverable upon dividends declared without a previous demand and a refusal to pay, and the question arises whether the rule stated is applicable under the state of facts presented in the case at bar. Under the resolutions of the stockholders and board of directors of the Michigan Southern and Northern Indiana Railroad Company the stock proposed to be issued was to be guaranteed and preferred, and certificates were issued to that effect, by which the dividends were to be paid semi-annually out of the net earnings of the company before any portion should be applied to the payment of dividends upon the remaining stock. Upon the 28th of February, 1865, the guaranteed stock had been reduced by purchase, cancellation and otherwise and a surplus remained of $743,000, which could have been applied to the payment of the arrears of the dividends of the stock in question, including that of the plaintiff. On the 1st of August, 1864, the directors in open violation of their agreement declared and paid a dividend upon the common stock of $277,664.20, and in March, 1865, a like dividend. These amounts were sufficient to pay all arrears of dividends on guaranteed *Page 188 
stock which were outstanding at the time this action was brought. Other sums were afterward paid for dividends upon the common stock in violation of the rights of the holders of guaranteed and preferred stock. These moneys, which should have been appropriated to the payment of the dividends due the preferred stockholders, were thus unlawfully diverted from that purpose. The security taken for the money advanced was not in the nature of an obligation for the repayment of money alone, nor the benefits or payments to be derived therefrom were not in substance or in effect interest upon money loaned merely, and therefore did not bear the character of ordinary obligations where the allowance of interest would be compounding the same, which the courts have regarded with disfavor and as unauthorized. The preferred stockholders merely obtained thereby an interest in the assets of the company which entitled them to the ordinary dividends the same as the common stockholders. The agreement to pay preferred or guaranteed dividends was an inducement to take the stock, and the dividends provided for were the only return for the moneys advanced. The security therefore taken differs from an annuity or ordinary dividend or an agreement to pay interest. This rule should more especially prevail where the sums to be paid were allowed only from time to time out of the net earnings which ought to have been applied and were wrongfully appropriated to the payment of dividends to the common stockholders who were not entitled to the same before the others were paid. By this illegal appropriation the common stockholders received dividends and if they chose could have invested the same and thus drawn interest thereon, while the preferred stockholders have no such advantage. Having thus misappropriated the funds out of which the interest was to be paid to the preferred stockholders, the company should be compelled to pay interest on the sums which their own act prevented from being paid. They refused to fulfill the contract or to do what was required by law to pay the plaintiff the dividend to which he was entitled, and compelled him to bring an action to enforce the declaration of dividends *Page 189 
and under these circumstances have no claim to be exempted from the payment of interest as damages as a consequence of their failure to perform a plain obligation. The plaintiff became damnified by the refusal of the company to declare a dividend when they had funds for that purpose and by the diversion of such funds his right to interest accrued by being compelled to institute an action to enforce the same. It may also be remarked that there were no specific dividends to demand until they had been declared, and hence the demand would have been unavailable and the case differs entirely from one where dividends have been declared or an annuity has been received or where money has been appropriated or received for such a purpose and nothing remains to be done except to pay it over when demanded by the person who is entitled to receive the same. Nor does it interfere with the right of the plaintiff to interest on dividends because this is an equitable action, for as no dividends had been declared and the plaintiff's remedy in part was to compel the officers of the company to declare such dividends, no other action could properly be brought in which adequate relief could be obtained. It is enough, we think, that the plaintiff's right to the interest exists to authorize the court to enforce his claim in this action.
The plaintiff's case bears no analogy to that of copartnerships when one of the partners is not entitled to interest as against the others. Nor is there any such laches in enforcing the plaintiff's demand, or by a failure to make a demand, or by bringing a suit at an earlier period as estops him from claiming such interest.
The learned counsel for the appellant has cited several English authorities where the courts have refused to allow interest to annuitants upon the arrears of an annuity although there were circumstances which before induced the courts to allow it. (Aylmer v. Aylmer, 1 Malloy, 87; Anderson v. Dwyer, 1 Schoales  Lefroy, 301; Booth v. Lycester, 3 Mylne  Craig, 459; Earl of Mansfield v. Ogle, 4 De G.  J. 38; Torre v.Brown, 5 House of Lords Cases, part 1, 555; Booth v.Coulton, 7 Jurist [N.S.], part 1, 207; Jenkins v. Bryant, *Page 190 
16 Simons, 272.) We have given to these cases the most careful consideration and they appear to establish a practice in the English courts to refuse interest upon annuities except under special circumstances, and one of these (3 Mylne  Craig, 459) appears to have been decided upon a question of intention. The rule seems to have been of modern origin, for the earlier cases are not entirely in the same direction. (Litton v. Litton,
1 P. Wms. 541; Ferrers v. Ferrers, Talbot's Cases, 2;Robinson v. Cumming, 2 Atk. 579; Drapers' Co. v. Davis,
id. 211; Morris v. Dillingham, 2 Ves. Sr. 170; Morgan v.Morgan, 2 Dick. 643.) Assuming, however, that the modern decisions are controlling, cases of this kind are not in point when the claim to interest rests upon an unlawful appropriation of moneys which were properly applicable to the payment of arrears of dividends as is the case here. And where the party who is bound to pay is in fault and diverts or fails to apply the money in his hands for the purpose of paying dividends which are legally due, the rule laid down as to annuitants cannot shield it from the consequences of the default. Such party is not exonerated for the apparent reason that he was lawfully bound to pay and could pay, had he chosen to do so, and utterly failed and neglected to perform this conceded duty and obligation.
For the reasons stated, without considering the question as to the right to a reargument, we are of the opinion that the motion should be denied.
All concur.
Motion denied.