CORPORATION LAW | B2015 CASE DIGESTS
Mclaran v. Crescent Planning Mill Co. 1906 Norton, J. Rañeses, Roberto Miguel O.
SUMMARY: Crescent declared dividends payable in four installments. It paid the first but refused to pay the second, as a new resolution of Crescent’s BoD rescinded the declaration of dividends upon finding out that the company’s financial condition was slightly worse than what was known. The plaintiff, a stockholder, asked that the second installment be paid. The court ruled in his favor. DOCTRINE: 1. Mere declaration of the dividend, without more, by competent authority under proper circumstances, creates a debt against the corporation in favor of the stockholders the same as any other general creditor of the concern: 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 stockholder 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 funds he has rights superior to the general creditor. 2.
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By 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, in so far as his pro rata proportion of the dividend is concerned. A cash dividend, properly declared, cannot be revoked by the subsequent action of the corporation.
FACTS: On Feb. 7, 1903, the BoD of Crescent Planning Mill Co. adopted the following resolutions: 1. Declare a dividend of six percent. 2. Dividends to be divided into four payments of 1 ½ % each, payable Feb. 15, April 1, July 1, and Oct. 1, 1903. No further resolution was passed nor were steps taken to set apart a fund out of which the dividends were to be paid. 1. It should be noted that the company was solvent at that time ($10k undivided profits, $29k surplus). Despite the fact that no separate fund was set aside, officers of the company paid plaintiff and the other stockholders the first installment of the dividend. 1. The second installment, however, was not paid. 2. It was found out that the financial condition of the company was $6k less than what had been understood. a. This reduced the surplus from $29k to $23k. 3. The board, in its resolution on April 11, was then prompted to rescind the payment of the remaining installments of dividends, including the second installment. a. It is, again, worth noting that the company was still solvent, as it had a comfortable surplus of $20k. Plaintiff requested payments of the installment falling due on April 1. This was refused. 1. Resolution of the BoD on April 11 superseded declaration of dividends. The plaintiff then filed suit. The lower court found for the plaintiff. 1. However, he was substituted by his counsel Mclaran upon his death. ISSUE: 1. WON the mere declaration of a dividend by a solvent corporation creates a debt in favor of the stockholder and
CORPORATION LAW | B2015 CASE DIGESTS
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against such corporation for the amount of such dividend in the absence of further express action on the part of the BoD. WON a corporation may rescind and recall the payment of installment dividends yet unpaid after having declared the dividend.
RULING: 1. YES. A declaration is enough. 2. NO. Since a declaration of dividend creates a debt against the corporation and in favor of the stockholder, it is a generally known principle that a debtor cannot rescind, recall, or revoke such declaration of dividends. RATIO: 1. Counsel for appellant, from the definitions he cited regarding the word “dividend,” predicates his argument that a resolution declaring a dividend is not sufficient to create a dividend. a. A resolution declaring a dividend, to be effectual, must be accompanied with competent action, like setting aside a fund from which such could be paid. i. Until such fund is set aside, no dividend has been declared, and therefore it is competent for an authority to rescind or recall the former action. 2. It has been adjudicated that when moneys for the payment of of such dividends are not set apart for the payment thereof, but are permitted to remain in the corpus of such corporate estate, the stockholder stands as general creditor of the concern in bankruptcy who can come in only notably with such creditors, looking to the general estate for liquidation of his dividend debt. a. This is the principle that the declaration of the dividends operating as a severance thereof from the stock in the general mass of the corporate property. i. The converse of this principle has been applied in cases where the dividend has been declared and a fund set apart out of which to pay the same.
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Such action of setting aside constitutes such moneys a trust fund in the hands of the corporation for use of the stockholders. 2. In the event of bankruptcy, stockholders are not required to go pro rata. 3. [See doctrine no. 1] Mere declaration of the dividends, without the setting aside of the fund, creates a debt. a. The use of terms “set aside,” “set apart,” and “actually set apart” in the definitions of “dividends” means that the act of declaring is, ipso facto, the setting aside itself. 4. [See doctrine no. 2] 5. It is therefore clear that a cash dividend, properly declared, cannot be revoked by the subsequent action of the corporation. a. As the corporation has become the debtor, the debtor cannot revoke, recall, or rescind a debt. 6. Ford v. East Hampton Rubber Thread Co. is not applicable a. In that case, the BoD declared a dividend but rescinded such before notifying the stockholders and that no fund had been set apart for the payment of such dividends. b. Unlike the CAB, no debt weas created there. DISPOSITIVE: Judgment affirmed.
