McLaran v Crescent Planing Mill Co. | 117 Mo. App. 40, 93 S. W. 819 | 1906 | J.

Nortoni

SUMMARY: Company issued a resolution declaring dividend payable in 4 installments. After

paying the first installment, the company discovered an error with respect to the financial
condition of the company. It then issued a resolution rescinding and recalling the dividends
payable. A stockholder brought suit to enforce payment of the dividends. SC ruled: Company must
pay dividends. Mere declaration of the dividend makes the company a creditor of the stockholder.
A separate resolution setting apart a fund from which the dividend is to be paid is unnecessary to
establish the creditor- debtor relationship. Since the creditor-debtor has already been established
by mere dividend declaration, the corporation cannot anymore recall or rescind its debt without
the consent of the creditor-stockholder.

FACTS:

 CPM: corp from Missouri (office in St. Louis); capital stock: $50,000; 500 shares (Par value:
$100)
 Robert Humber—Corps testator; proprietor of 57 fully paid shares of corp; was a director and
was president of the Board of Directors.

 Corp had surplus funds of $29,000, and held a meeting (Feb 7, 1903) and unanimously
adopted:
o declared a 6% cash dividend payable in four installments of one and a half per cent
each
 No separate resolution was passed to set apart a fund out of which to pay the dividends.

 The first installment was paid by the Board (Feb 1903)

 Thereafter, after failure to pay the second installment (Apr 1903), an error was discovered in
the computation of the assets:
o Surplus was reduced from the initial recognized $29,000 to $6,000.
 Mainly for this reason, the Board adopted a resolution rescinding the dividends payable on
the three other installments despite the solvency of the corp and the existence of ample funds
to pay said dividends.
o Company was perfectly solvent and had ample funds on hand at the time to pay the
dividend and retain a comfortable surplus of $20,000
 Humber demanded from the corporation the payment of the subsequent installments of the
dividends due to him, corp refused.
 He filed this case seeking to recover the amount, but died, and was substituted by McLaran,
the administrator of his estate.
o Lower court ruled in favor of the corp:
 “no funds were set apart for the payment of said dividend at the time of or
after the same had been declared by the board of directors and that nothing
was done in respect to the installment to be paid April 1, 1903, except to
adopt the resolution declaring the said dividend […] the board of directors of
defendant corporation, in good faith, adopted a resolution rescinding and
recalling said dividend, then plaintiff cannot recover"
 The defendant corp maintained that there was no valid declaration of dividends because the
corporation failed to set aside funds to pay for the same.

ARGUMENTS:
  Plaintiff McLaran: Mere declaration of dividends created an obligation on the part of the
corporation to pay the same to the shareholders, creating a debtor-creditor relationship
between them

 Defendant Corp:

o 1) mere declaration of dividends, WITHOUT SETTING APART A FUND FOR THE

PAYMENT THEREFOR, does not create an obligation to pay on the part of the
corporation; and
o 2) that in any event, the prior declaration of dividends was RESCINDED by the Board
subsequently

ISSUES:

1. W/N the mere declaration of a dividend by a solvent corporation under such circumstances as
indicated, creates a debt in favor of the stockholder and against such corporation for the
amount of such dividend in the absence of further express action on the part of the board of
directors, setting aside a fund out of which to pay such dividend? YES.

(Can the shareholder demand the payment? YES)

 Counsel for corp presents the following definitions of the word "dividend," from the
authorities cited:
o "A dividend is defined as follows:
 'A profit set aside, declared by the board of directors of a corporation
and ordered by them to be distributed among the holders of its stock.'
 'A dividend is a corporate profit, set aside, and ordered by the
directors to be paid to the stockholders on a fixed date.'
 'A dividend is a fund which the corporation sets apart from its profits
to be divided among its members.
 'A dividend is that portion of the profits and surplus funds of the
corporation which has been actually set apart by a valid resolution of
the board of directors, or by the shareholders at a corporate meeting,
for distribution among the shareholders according to their respective
interests, in such a sense as to become segregated from the property
of the corporation, and to become the property of the shareholders,
distributively.'
 Based on the words "set aside," "set apart," and "actually set apart," counsel argues
that a resolution declaring a dividend is not sufficient to create a dividend, or, to
create a debt from the corporation to the stockholders therefor, in the absence of
further action on the part of the corporation setting apart a fund out of which the
dividend or debt is to be paid.
o It is argued that a declaration of a dividend and the fixing of a time for its
payment does not create a dividend if there has been no setting apart of a
fund out of which it is to be paid.

 SC: Based on jurisprudence (notes), if the declaration of the dividend is fairly and
properly made, out of profits existing at the time it is declared, the relation of
debtor and creditor is thereby established between the corporation and the
stockholders and a debt is thereby created against the corporation and in
favor of the stockholder for the amount of the dividend due on the stock
held by him.
  The doctrine is that a dividend is considered parcel of the mass of corporate property
until declared and therefore incident to and parcel of the stock up to the time
it is declared, and before its declaration, will pass with the sale or devise of the
stock.
 Whosoever owns the stock prior to the declaration of a dividend, owns the dividend
also, but the moment the dividend is declared it becomes then separate and distinct
from the stock and the dividend falls to him who is proprietor of the stock of which it
was theretofore incident.

 The mere declaration of the dividend, without more, by competent authority under
proper circumstances, creates a debt against the corporation in favor of the
stockholder the same as any other general creditor of the concern;

o Whereas, the setting apart of a fund after or concurrent with the

declaration, out of which the debt thus created is to be paid, passes one step
further toward securing the payment of the identical fund to the shareholder
inasmuch as the law treats the setting apart of such fund as a payment
to the corporation as trustee for the use of the stockholder, on which
fund the stockholder has a lien, and to which fund he has rights
superior to the general creditor.
 (basically in the words of upper batch digester hahaha:)
 Where a corporation, after declaring dividends, ALSO sets apart a fund
to pay such dividends (as opposed to the earlier case where there is only
a declaration but no fund set apart), the corporation sets apart such
fund as TRUST FUND in the hands of the corporation for the benefit of
the shareholders. In such a case, in the event of bankruptcy, the
shareholders DO NOT STAND AS GENERAL CREDITORS to the
corporation, but are actually creditors WITH A LIEN upon such trust
fund. Effectively, the shareholders, as LIEN HOLDERS, will have a
SUPERIOR RIGHT to the general creditors of the corporation.

 So the mere declaration of the dividend itself (without the setting aside of the fund)
creates a debt and when using the terms "set aside," "set apart," and "actually set apart,"
as above pointed out, they proceed upon the theory and principle earlier stated, that the
act of declaring a dividend, operating as it does, as an actual severance of the
dividend from the stock and corpus of the corporate property and estate,
is ipso facto, in and of itself, the setting apart, setting aside and segregating
such dividends
o It creates an immediate right of the stockholder to demand and recover
the same when due, inasmuch as thereby it is actually severed and segregated
from the other property.
 By the mere declaration, the dividend becomes immediately fixed and absolute in the
stockholder and from henceforth the right of each individual stockholder is changed by
the act of declaration from that of partner and part owner of the corporate property to a
status absolutely, adverse to every other stockholder and to the corporation itself, insofar
as his pro rata proportion of the dividend is concerned.

2. W/N it was competent for such corporation, after having declared the dividend, to pay one
installment thereon and to rescind and recall the installments thereof yet unpaid? NO.

 A cash dividend, properly declared, cannot be revoked by the subsequent action of the
corp. for by its declaration, the corp had become the debtor of the stockholder and it
goes without saying that the debtor cannot revoke, recall or rescind the debt or
 otherwise absolve itself from its payment by a unilateral action or without the
consent of the creditor.
 Thus, the rescission by the Board of the subsequent installments was of no force.
 Corp cites Ford v. East Hampton Rubber Thread Co., in arguing that rescission was
proper:
o In that case it appears that the board of directors made and declared a
dividend, but before notifying any of the stockholders except the directors
themselves who were present, and without having set apart a fund for its
payment, rescinded and recalled their action declaring the same.
o None of the stockholders knew of the original vote by which the dividend was
declared, and that no fund had been distinctively set apart for its payment,
"the passage of the vote did not constitute an actual contract of the
corporation with the stockholders, but was merely a mode of dividing its
profits, and it is therefore competent under the circumstances, to rescind the
dividend."

 SC: The decision of that case can only be sustained upon the theory that the
declaration of the dividend did not create a debt to the stockholders, for if a debt was
thereby created, it is preposterous to say that such debt can be cancelled by the
action of the debtor without the consent of the creditor.
 In the case at bar, the shareholders were already informed of the dividends due to
them, and they even received the payment of the first installment due on such
dividends.

DISPOSITIVE: The court is therefore of the opinion that the learned trial judge properly refused the
instruction requested. The judgment will therefore be affirmed. It is so ordered.

NOTES:
Cited cases by SC:

 De Gendre v. Kent: such dividends were happily likened to fallen fruit which does not pass
with the sale or gift of the tree; the principle clearly established being that the act of
declaring the dividend operates as a severance thereof from the stock
 Missouri Baptist Sanitarium v. McCune: the time the law fixes in adjusting the ownership
of dividends is the time when the dividends were declared and thus severed from the stock
of which they were theretofore treated as incident.
 Wright v. Warren; Browne v. Collins; Ibotson v. Elam; Jacques v. Chamber: Under the
foregoing principles, a specific legatee of corporate shares is entitled to all dividends which
are declared after the de death of the testator.
 Brundage v. Brundage; In re Kernochan et al.; Johnson v. Bridgewater Iron Mfg. Co: A
transfer of stock passes, of course, all dividends declared subsequent to the transfer
although the dividend was earned before the transfer was made. A legatee of shares takes
the stock as it was at the time of the testator's death. All dividends declared previous to that
event go to the administrator.
 Lowne v. Amer. Fire Ins. Co., Hunt v. O'Shea: And upon the principle that the declaration of
the dividend operates as a severance thereof from the stock in the general mass of the
corporate property, and raises from such declaration an implied promise on the part of the
corporation to pay the stockholder the amount of the dividend, it has been adjudicated that
when moneys for the payment of such dividends are not set apart for the payment thereof,
but are permitted to remain still in the corpus of such corporate estate after the declaration.
the stockholder stands as a general creditor of the concern in bankruptcy who can come in
only ratably with such creditors, looking to the general estate for liquidation of his dividend
debt.