Court Opinion

ID: 3488341
Source: CourtListenerOpinion
Date Created: 2016-07-05 21:16:39.209014+00
Date Added: 2024-06-11T12:49:15.458903
License: Public Domain

The authorities are not in accord, and no attempt to discuss them will be made, but the major grounds of dissent should be stated. If a corporation either be insolvent and a dividend be declared and paid out of capital, or be made insolvent by the declaration and payment of a dividend out of its capital, and the corporation shall, upon either contingency, continue thus insolvent, there can be no doubt that the creditors existing at the time of the declaration and payment of the dividend have a right of recovery against the stockholders, who have been paid the dividend, on the plain and clear principle that creditors must be paid before capital *Page 486 
may be distributed among stockholders to the resultant prejudice of existing creditors. There is no basis in law or equity to support a stockholder's retention of an unearned dividend which has been paid to the depletion of the corporate capital. In these circumstances, the dividend is a gratuity. The right to have such a dividend returned is clearly demanded by considerations of public policy, which is at once concerned with the maintenance of an equivalence between corporate capital as represented and as possessed, and with a conformity in corporate management to the rules of rectitude normally governing a reasonable and upright man in a business transaction.
A party to a prospective or subsisting contractual or other relation with the corporation may be held charged with the financial risks and losses incident to its commercial affairs, since these are to be anticipated, and may occur without wilful diminution or any imputation of bad faith, but this is not so with corporate dishonesty, or division of capital of a going concern, because this is an abnormal happening, and the law proceeds upon the theory that usually the individual or corporate person acts honestly, and therefore will not make a wilful and unlawful withdrawal of the capital dedicated to the carrying on of the business.
It is therefore not upon the ground that the capital and assets of a corporation constitute a trust fund for the benefit of creditors that the capital and assets cannot be distributed among its stockholders or appropriated to their benefit, if creditors are thereby left unpaid. The true ground is that, if while insolvent, or if thereby made insolvent, a distribution of the assets among the stockholders is made, leaving corporate creditors unpaid, a fraud is perpetrated upon the subsisting creditors (McDonald v. Williams, 174 U.S. 397, 19 S. Ct. 743,43 L. Ed. 1022; Fear v. Bartlett, Trustee, 81 Md. 435, 32 A. 322;Holt v. State Roads Commn., 124 Md. 66, 73, 74, 91 A. 874), but not upon future creditors, unless actual fraud against the latter is intended. Graham v. La Crosse etc. R. Co., 102 U.S. 148,26 L. Ed. 106; Oakford Realty Co. v. Boarman, 156 Md. 65, 71,143 A. 644. *Page 487 
A dividend is the legitimate and normal return upon capital invested by the stockholder, and, if the dividend should be unearned and its payment impair the capital of the corporation, the stockholder would, nevertheless, be receiving his proportionate share of the distributed corporate assets, which, if not made in fraud of subsequent creditors, or if not declared and paid while the corporation was insolvent or thereby made insolvent, neither the creditors of the corporation nor its receiver or trustee or other officer of the court to wind up its affairs would have any basis to compel restitution by the stockholders. The principle that the stockholder, who has received an unearned dividend which has depleted the assets of a corporation, must refund upon a liquidation of the corporate affairs, has therefore no application, unless a subsisting creditor be injured. The doctrine is equitable in nature, and is reasonable and necessary to the protection of the creditors of an insolvent corporation who have dealt with it in reliance on its capital being unimpaired, but should not extend beyond conditions which the doctrine was formulated to relieve. The principle has its closest analogy in those embodied in Statute of 13th Elizabeth; and does not, it is submitted, validly rest upon the arbitrary conception that the capital assets of a corporation constitute the corpus of a trust for the benefit of corporate creditors. Supra.
2. Where there is a right of recovery of an unearned dividend which was paid while the company was insolvent, or thereby so made, the remedy is in equity. The liability to restore rests on fraud. Insolvency at the time of the dividend is a primary element in the right to sue, and is a question which usually requires an accounting for its determination. The right to restitution involves the rescission of the declaration of the dividend, and the power to enforce this right comes from equity creating, in favor of all existing creditors of an insolvent corporation, a lien or charge on the money passing as dividend into the hands of the stockholder. No privity of contract exists between the creditors of the corporation and the stockholder of the corporation. Nor was *Page 488 
the illegal declaration and payment of the dividend by the corporation the wrongful or fraudulent act of the innocent individual stockholder, who merely received, as the result of the corporate act of a distinct legal entity, a due proportion of its apparent net earnings. The right of the creditor to have restitution made is a right which he possesses in common with all other creditors in a similar situation, and this liability of the stockholder to refund is not confined to one shareholder, but to all who have received their respective portions of the dividend. Equity grants, ex aequo et bono, that the shareholder refund, but the refunding is for the benefit of all and not of one, and should not be in excess of an amount which, in conjunction with ratable amounts collectable from other shareholders similarly liable, would be necessary to meet any deficiency of assets to discharge the just demands of the creditors affected.
Without a suit on behalf of all of the class of creditors damnified and against all the participating stockholders, except such as should be shown to be not united because impracticable, impossible, or for some other sufficient cause, no jurisdiction, except that of equity, would be capable of determining the rights and liabilities of the various parties with full and complete justice, and of moulding its relief according to the exigencies of the questions for adjudication and the rights and liabilities to be enforced. The rights and the procedure grow out of equitable principles, and are the heads of equitable jurisprudence. To follow a dividend into the hands of a stockholder and to compel its restitution to the extent of the capital so appropriated, in order to enforce the superior equity of an existing creditor, is a right and remedy of equitable origin, and has no comparable counterpart in law. In addition, equity permits the recovery in a single suit of the several obligations of all the shareholders, and thus avoids a multiplicity of actions. Furthermore, a foreign corporation engaged in business in Maryland is made subject to our statutes with respect to procedural matters. Code, art. 23, secs. 117, 345. On principle, an action at law for money had and received would not seem to lie. *Page 489 
The illegal dividend was not originally received by the shareholder to the use of the corporation. Nor did it belong, at the time of the action, to the corporation, and not to the shareholder in his own right. The corporation then was in the course of liquidation, and in no forum was the dividend paid recoverable by the corporation in the course of the conversion and distribution of its assets among its creditors, except upon the dividend being set aside on the ground of its illegality and of the existence of the facts giving rise to an equity in a particular class of the general creditors. The enforcement of this equitable lien or charge is a matter of equitable origin and cognizance, and, when a corporation is in course of liquidation in equity, the duty to make restitution is not a primary but a secondary liability of the shareholder. The majority opinion holds that jurisdictions of law and equity are concurrent, but, in the absence of a statute, an observance of the fundamental difference of law and equity would seem to indicate that the proceedings should be confined to equity.
DIGGES, J., also dissents.