Lockhart v. Van Alstyne

• Decision Date: 12 January 1875
• Citation: 31 Mich. 76
• Court: Michigan Supreme Court
• Parties: George Lockhart v. John Van Alstyne

31 Mich. 76

George Lockhart v. John Van Alstyne

Supreme Court of Michigan

January 12, 1875

Heard October 14, 1874

Error to Superior Court of Detroit.

Judgment affirmed, with costs.

Ward & Palmer and Alfred Russell, for plaintiff in error.

S. T Douglass and G. V. N. Lothrop, for defendant in error.

OPINION

Cooley J.:

The plaintiff seeks to recover of the defendant a sum alleged to be owing to the plaintiff by the Wyandotte Agricultural Works, and for which it is claimed the defendant is liable in consequence of the failure of the officers of that corporation, of whom he was one, to make and file the official reports required by law. A recovery is resisted on several grounds, but as the question of corporate indebtedness seems first in point of order, we shall consider it first.

The supposed liability arises upon a certificate of stock issued by the officers of the corporation in accordance with a vote of the board of directors, of which the following is a copy: "Resolved, that the company issue thirty-six thousand dollars of preferred capital stock, upon which a semi-annual dividend of five per cent, payable upon the first days of March and September in each year, shall be guaranteed by the company; the first semi-annual dividend payable on the first day of September, 1872. And the holders of any such preferred stock shall have the privilege, for one year after the first day of March, 1872, of exchanging the same, if they desire, for the common stock of the company."

The certificates of stock issued under this resolution were in all respects in the usual form, but the following endorsement was made upon them: "Full paid stock; 5 per cent semi-annual dividend guaranteed from Sept. 1, 1872. Elisha Mix, Sec'y and Treas'r." The plaintiff became the purchaser of certificates representing $ 2,000 of stock, upon which the company paid two semi-annual dividends, but has failed to pay any more; and it is conceded that those which were paid were not and could not be paid from profits, because there have been no profits since the certificates were issued; and the corporation has now ceased to carry on the business for which it was organized.

The statute which the plaintiff relies upon is Sec. 1821 of Comp. L. of 1857, which, on the neglect or refusal of the directors of manufacturing companies to comply with certain provisions of law regarding the filing of their articles of association, and of annual reports showing their financial condition, declares that such directors "shall be jointly and severally liable in an action founded on this statute, for all the debts of such corporation contracted during the period of such neglect or refusal." This statute, it will be perceived, only makes the directors personally liable for "debts." Liabilities of a company which may give causes of action against it and result in judgments are not within the statute unless they constitute present debts. A debt is that which one person is bound to pay to another, either presently or at some future period; something which may be the subject of a suit as a debt, and not something to which the party may be entitled as damages in consequence of a failure to perform a duty or keep an engagement. A right to a dividend from the profits of a corporation is no debt until the dividend is declared. Until that time, the dividend is only something that may possibly come into existence, but the obligation on the part of the corporation to declare it, cannot be treated as the dividend itself.--In re London India Rubber Co., Law Rep., 5 Eq. Cases, 525-6. This seems to be conceded by counsel for the plaintiff, who insist that the guaranty in this case is not of dividends to be made necessarily of profits, but of dividends to be made from some sum which the corporation undertakes to set apart for the purpose, and which, if there are no profits for the purpose, there is an absolute and unqualified obligation to pay from some other source. In other words, that the word "dividend" means only something to be divided; and to the persons who are to participate in the division it is immaterial whence it comes, so that the fund be actually provided, and payment made in pursuance of the obligation.

We are referred to no authority in which the word dividend has been interpreted in accordance with this view, nor are we aware that it is used in this sense among business men. A dividend to the stockholders of a corporation, when spoken of in reference to an existing organization engaged in the transaction of business, and not of one being closed up and dissolved, is always, so far as we are aware, understood as a fund which the corporation sets apart from its profits, to be divided among its members. A corporation of which it is said that it is making an annual dividend of ten per centum upon its stock, is supposed to be a prosperous corporation, because its gains leave it this clear annual per centage, which it can pay over without impairing its capital. A dividend among preference stockholders exclusively, is understood to imply that the sum dividend has been realized as profits, though the earnings do not yield a dividend to the stock-holders in general. We hazard nothing in saying that this is the primary and universal understanding of a dividend on stock, except when made use of in respect to a final closing up and distribution of assets on the occurrence of insolvency or in view of a dissolution. This is manifestly the view of the court in Stevens v. South Devon Railway Co., 9 Hare 312; Henry v. Great Northern Railway Co., 1 De Gex & Jones, 605; Taft v. Hartford P. & F. Railroad Co., 8 R.I. 310; and in every other case in which we have found the word employed in any connection corresponding to that in which it is made use of here.

The difficulty in this case springs from the fact that in the case of this corporation there are no profits from which a dividend can be made. The question arises, in view of that fact, whether the guaranty becomes wholly inoperative for want of something to which it is applicable, or whether, on the other hand, it can be understood as binding the corporation to make payment of the dividend in any contingency, and to respond in damages to an equivalent amount in case of failure. The latter is the theory of the present suit; the plaintiff reading the guaranty as a promise in perpetuity to pay a semi-annual dividend of five per centum to the preference stockholders, profits or no profits; in other words, to...