Equitable Life Assur. Soc'y of the United States v. Union Pacific R. Co.

• Decision Date: 14 July 1914
• Citation: 106 N.E. 92,212 N.Y. 360
• Parties: EQUITABLE LIFE ASSUR. SOCIETY OF THE UNITED STATES v. UNION PAC. R. CO.
• Court: New York Court of Appeals Court of Appeals

212 N.Y. 360

106 N.E. 92

EQUITABLE LIFE ASSUR. SOCIETY OF THE UNITED STATES

v.UNION PAC. R. CO.

Court of Appeals of New York.

July 14, 1914.

Appeal from Supreme Court, Appellate Division, First Department.

Action by the Equitable Life Assurance Society of the United States against the Union Pacific Railroad Company. From an order of the Appellate Division (162 App. Div. 81,147 N. Y. Supp. 382) affirming an order granting defendant's motion to dismiss the complaint, plaintiff appeals. Affirmed.Charles W. Pierson, of New York City, for appellant.

John G. Milburn, of New York City, for respondent.

HISCOCK, J.

This action was brought by the plaintiff as the holder of a large amount of the preferred stock issued by defendant to restrain the distribution by the latter of about $80,000,000 as a dividend among its common stockholders. The material facts set forth in the complaint which asks this relief are as follows:

At the times involved the defendant had a large outstanding issue both of preferred and common stock. Prior to January 8, 1914, it had carried to the credit of its profit and loss account large amounts based on valuations which are not questioned, and at that date the credit balance of this account was more than $80,000,000. Of this amount upwards of $15,000,000 had accrued through the retirement of defendant's convertible bonds with common stock on a basis of one share of stock at par for $175 par value of bonds, and upwards of $58,000,000 had accrued as gain or profit on the sale of stocks of other corporations purchased and held by or for the benefit of the defendant. On the date above mentioned the defendant declared the extraordinary dividend in issue payable in cash and property to its common stockholders and chargeable against said balance so standing to the credit of its profit and loss account . The plaintiff holds its preferred stock under a clause in the defendant's articles of association which reads as follows:

‘Such preferred stock shall be entitled, in preference and priority over the common stock of said corporation, to dividends in each and every fiscal year, at such rate, not exceeding four per cent. per annum, payable out of net profits, as shall be declared by the board of directors. Such dividends are to be noncumulative, and the preferred stock is entitled to no other or further share of the profits.’

It is conceded that the plaintiff has received all of the dividends and ‘profits' to which it is entitled under the foregoing article. It is also conceded that the amount carried to the credit of profit and loss as above stated need not be retained by the defendant but may be distributed among its stockholders. It is, however, insisted that this balance does not represent profits which, under the foregoing article, may be distributed exclusively amongst holders of common stock, but that it represents, to the extent of the two items above mentioned, an increase of or accretion to capital which must be distributed as capital amongst all the stockholders, including those holding preferred stock. Thus arises the question which we are required to decide. If this is a distribution, even though unusual in amount, of accumulated gains or profits of a character which the directors of a going corporation may at any time in their discretion divide amongst the stockholders as returns or income on their investment, the plaintiff has no ground for complaint. It elected to take stock having a preferred but limited right to dividends and profits. It chose the right to returns on its investment which made up in certainty for what they lacked in possible quantity, and there is no inequity in holding it to its choice. If, on the other hand, all or part of the gains which it is proposed to distribute are accretions to and have somehow become permanent capital and been withdrawn from availability for dividends, it will be assumed that they must be distributed amongst all the stockholders.

When a corporation is organized, it secures capital by the issue of shares of capital stock. The fund or property thus secured answers the twofold purpose of furnishing means for carrying on the operations of the corporation and also security for the payment of creditors. This capital stock is carried as a liability and universally, so far as I am aware, at its par amount. It is thus carried as a liability because this is the proper bookkeeping entry. But, aside from this, such entry also serves to emphasize the duty of the corporation to keep its capital stock unimpaired for the protection of those dealing with it. If the operations of the corporation result in gains, such gains are carried to the credit, not of the capital stock account, but of some other account as surplus or profit and loss . Of course they may be capitalized by the issue of stock against them, and sometimes in the cases of certain corporations like banks or insurance corporations, where a certain ratio between assets and liabilities other than to capital stock is required, such surplus or profits may be counted and maintained as capital, although not formally capitalized.

In the absence of some such special consideration, I think we may take notice that it is the ordinary rule of corporate management established by decisions, statutes, and business usages that the surplus of these gains or profits, beyond what may be necessary to keep good the liability to capital stock which has been issued, may, in the discretion of a board of directors, be distributed amongst its stockholders as dividends and returns on their investment. Such being the general rule, it is incumbent on the plaintiff to show that there is something so peculiar in the two transactions being considered that the profits resulting therefrom are of a different nature in respect of this subject than those ordinarily realized in corporate business, and I think it has failed to do this.

I shall not attempt to discuss whether there might be an accretion to or increment of capital of a going corporation under such circumstances and of such a character that it would become permanent capital and might not be distributed as dividends. That question, for the purposes now concerning us, doubtless would be surrounded with some uncertainty and difficulties. It is sufficient for this appeal to consider the transactions before us and see, as I think we must, that there is nothing about them which impresses their results with any other character than that of ordinary current profits which the directors may in their discretion divide among the stockholders entitled to dividends.

It is said, because in the retirement of its convertible bonds defendant sold and issued its capital stock at $175 per share of $100 par value, that this entire sum was paid in as capital and must be held and distributed as such. That is not my interpretation of the transaction under the allegations of the complaint. The amount at par value paid for each share of stock undoubtedly became capital which the corporation was required to preserve and maintain as against its liability on the outstanding share of stock which had been issued for it. Just as undoubtedly the extra $75 paid per share represented the amount of accumulated profits or surplus which it was supposed would be apportionable to each share of new stcok after payment and issue as aforesaid. In other words, as I think we must assume, the payment of this premium was not for permanent capital but for the purpose of equalizing as between new and old stockholders their respective rights in accumulated profits, which, so far as we know, were current and distributable in dividends. When paid in, this premium became part of such accumulation of profits and surplus and distributable as...