Court Opinion

ID: 3597491
Source: CourtListenerOpinion
Date Created: 2016-07-05 23:44:29.962277+00
Date Added: 2024-06-11T14:00:46.869760
License: Public Domain

The complaint shows that during the years 1912, 1913, 1914 and 1915 the Interborough-Metropolitan Company received from dividends on stock of the Interborough Rapid Transit Company held by it an amount of money far in excess of the sum required for the payment of interest on the bonds of the Interborough-Metropolitan Company, and that the surplus was accumulating in its treasury. It had assets of more than $52,000,000 in value over and above its debts and obligations. It can hardly be said, therefore, that further accumulation of income in its treasury was reasonably required for the protection of its creditors. It had outstanding almost $50,000,000 par value of preferred stock. The corporation might not distribute as dividends the income which was accumulating in its treasury, for *Page 358 
that was forbidden by section 28 of the Stock Corporation Law (Cons. Laws, ch. 59) as long as its capital was impaired by losses previously suffered, to an amount of over $80,000,000. The corporation was, therefore, bound to allow its surplus income to accumulate in its treasury or to find some means by which it might surmount the obstacle in the way of its distribution among the stockholders.
The creditors of the corporation had no lien upon the moneys which were accumulating, or upon the capital of the corporation. The doctrine that the capital of a solvent corporation constitutes a trust fund for the payment of its creditors has been assailed by judicial and extra-judicial writers. (See Thompson on Corporations [2d ed.], section 3418.) "The officers of a corporation act in a fiduciary capacity in respect to its property in their hands, and may be called to an account for fraud or sometimes even mere mismanagement in respect thereto; but as between itself and its creditors the corporation is simply a debtor, and does not hold its property in trust, or subject to a lien in their favor, in any other sense than does an individual debtor." (Hollins v. Brierfield Coal  Iron Co.,150 U.S. 371.) Doubtless for some purposes the trust fund doctrine will still be applied. (Trotter v. Lisman, 209 N.Y. 174.) It has never been applied so as to limit the right of the directors of the corporation to deal with the property of the corporation, while solvent, in any manner not forbidden by law nor in fraud of its creditors.
The trust fund doctrine need not, however, be invoked in order to furnish a creditor with a remedy for unlawful or fraudulent diversion of the assets of the corporation. So long as the capital stock of the corporation remained impaired by losses previously sustained, the corporation had no surplus profits which it could distribute as dividends. Declaration of dividends under such circumstances would constitute an unlawful diversion of the *Page 359 
corporate property for which the law would furnish redress to those injured. The Stock Corporation Law, however, provided that a corporation might reduce its capital. If the capital was reduced, then the corporation might lawfully distribute any surplus over the reduced capitalization. In other words, the law did not absolutely prohibit the distribution of the moneys then in the treasury of the corporation or the moneys which might thereafter be paid into the treasury; distribution was unlawful only so long as the capital stock of the corporation was larger than its assets. (Strong v. Brooklyn Cross-Town R.R. Co.,93 N.Y. 426.) In this case, however, as Judge CRANE has pointed out, the corporation could not by reason of its outstanding bonds avail itself of the method provided by the Stock Corporation Law in the form it then existed for reduction of its capital stock.
The Business Corporations Law offered another method by which similar results might be achieved. Two or more corporations may merge their identity into a consolidated corporation (Sec. 7). The bondholders might not complain at lawful consolidation, for the deed of trust expressly permitted it. The capital stock of the new corporation which comes into existence through the merger need bear no relation to the capital stock of the original corporations. The directors entered into a consolidation agreement with the Financing and Holding Corporation which had assets of only $550 in cash, and the capital stock of the new corporation was fixed at a figure within the net value of its assets. The new corporation could declare dividends out of surplus profits as long as its own capital stock remained unimpaired.
It is not claimed that by the attempted consolidation a new corporation did not come into existence in which the identity of the old corporations was lost. It is not claimed that such new corporation might not ordinarily declare dividends out of surplus profits above its own capitalization, *Page 360 
but it is said that in this case the consolidation was only a form or subterfuge intended to accomplish an unlawful result, viz., the distribution of income received by a corporation while its capital was impaired. Undoubtedly the inference is clear that the consolidation of a corporation having net assets of $52,000,000 with a corporation with assets of $550 was only a form used to accomplish the distribution of corporate assets otherwise forbidden. It does not follow that the subsequent distribution was unlawful. It is true that the time has passed when the courts will permit an unlawful result to be achieved, even by means which are not themselves illegal. The law may not be circumvented by subterfuges and the courts will look behind the form to determine whether an act is inherently unlawful. Distinction must nevertheless be drawn between cases where a result is itself wrongful and unlawful regardless of the means by which it is accomplished, and cases where the wrong or illegality is inherent only in the means by which the result is attained. In the latter cases there is no evasion of the law where legal means are substituted for those which are prohibited.
Here there was no fraud on creditors or other inherent wrong in distribution of income by a corporation having net assets of $52,000,000 above its debts and obligations. Distribution in the form of dividends would, however, be illegal so long as the capital of the corporation was impaired by losses previously sustained. In contemplation of law such distribution would be made out of capital. On the other hand, as soon as the corporation's capital was no longer impaired, the distribution would become lawful. As the law now stands, a corporation situated as the Interborough-Metropolitan Company was in 1915, might lawfully reduce its capital to $50,000,000 or less and distribute its surplus. (Sections 36, 37 and 38 of the Stock Corporation Law.) As the law stood in 1915, a corporation so situated might not do so. It might, however, merge its identity in a new corporation with *Page 361 
smaller capital and thereby achieve the same result. Then the new corporation might lawfully declare dividends so long as such dividends did not result in impairment of the new capital. That was the course taken by the directors of the Interborough-Metropolitan Company in this case. True, the consolidation was made only because the machinery provided at that time for reduction of capital of a corporation which maintained its separate identity could not be used. It was not, however, unlawful at that time to achieve by the use of a more cumbersome method the result which today might lawfully be accomplished more directly.
For these reasons I think that the complaint fails to allege facts sufficient to constitute a cause of action against any of the defendants, and the judgment should be reversed.
CARDOZO, Ch. J., POUND, ANDREWS, KELLOGG and O'BRIEN, JJ., concur with CRANE, J.; LEHMAN, J., dissents in opinion.
Ordered accordingly.