MaCkall v. Pocock
| Decision Date | 02 February 1917 |
| Docket Number | 20,051 - (180) |
| Citation | 161 N.W. 228,136 Minn. 8 |
| Parties | HENRY C. MACKALL v. MERTON A. POCOCK |
| Court | Minnesota Supreme Court |
Action in the district court for Ramsey county by the trustee in bankruptcy of the Acme Tag & Manufacturing Company to recover $44.20. The case was submitted upon stipulated facts to Dickson, J., who ordered judgment in favor of defendant. From the judgment entered pursuant to the order for judgment plaintiff appealed. Reversed.
Corporation -- recovery of unearned dividends by trustee in bankruptcy.
Dividends paid to stockholders out of the capital of a corporation at a time when it had made no profits, owed debts, but was not then insolvent may, the corporation thereafter becoming bankrupt, be recovered back by the trustee in bankruptcy for the benefit of creditors who became such after the payment of such dividends, it not appearing that such creditors did not deal with the corporation in reliance on its capital being unimpaired as represented.
Orr Stark & Kidder, for appellant.
T. R. Kane, for respondent.
Plaintiff, as trustee in bankruptcy of the Acme Tag & Manufacturing Company, a domestic manufacturing corporation, brought this action to recover of defendant, a stockholder, unearned dividends paid to defendant by the corporation. The facts were stipulated. The court found as a conclusion of law that plaintiff was not entitled to recover. Judgment was entered accordingly, and plaintiff appealed.
The question is whether or not dividends paid to stockholders out of the capital of a corporation, at a time when the corporation had made no profits, owed debts, but was nevertheless solvent, can be recovered back by a trustee in bankruptcy for the benefit of creditors whose claims were created after the payment of such dividends.
The stipulated facts present squarely the question stated. Defendant purchased his stock in the corporation in April and May, 1910. In September of that year the directors declared a dividend of 8 per cent, though the corporation had earned no profits to pay it. Shortly thereafter the dividend declared was paid to defendant. He had no knowledge that it was not earned. The corporation, though it had no surplus, and had not earned profits, was actually solvent, and the payment of the dividends declared did not render it insolvent. It was adjudged a bankrupt September 10, 1912, and there are no funds in possession of plaintiff trustee applicable to the payment of over $10,000 in unsecured debts filed and allowed in the bankruptcy proceedings. These debts were all created after the so-called dividends were paid.
There is no direct decision by this court on the exact question involved. The Federal courts have uniformly held against the right to recover dividends so paid when the stockholder acts in good faith and the corporation is not at the time insolvent. Graham v. Railroad Co. 102 U.S. 148, 26 L.Ed. 106; Wabash, St. L. & P. Ry. Co. v. Ham, 114 U.S. 587, 5 S.Ct. 1081, 29 L.Ed. 235; Hollins v. Brierfield Coal & Iron Co. 150 U.S. 371, 14 S.Ct. 127, 37 L.Ed. 1113; McDonald v. Williams, 174 U.S. 397, 19 S.Ct. 743, 43 L.Ed. 1022; New Hampshire Sav. Bank v. Richey, 121 F. 956, 58 C.C.A. 294; Great Western Mining & Mnfg. Co. v. Harris, 128 F. 321, 63 C.C.A. 51. In Kom v. Cody Detective Agency, 76 Wash. 540, 136 P. 1155, 50 L.R.A. (N.S.) 1073, it was held that an agreement by a corporation to purchase from a stockholder its own stock was both contrary to public policy and in violation of a statute of that state making it unlawful for a corporation to make any dividend except out of profits, or to divide, withdraw or in any way pay to the stockholders or any of them any part of the capital stock of the company. This was held, notwithstanding the fact that the corporation was solvent and had no creditors at the time. The Michigan court has in several cases upheld the right to recover of stockholders dividends paid out of capital, though the corporation is solvent at the time, and the creditors are subsequent creditors. American Steel & Wire Co. v. Eddy, 130 Mich. 266, 89 N.W. 952; Id. 138 Mich. 403, 101 N.W. 578; Detroit Trust Co. v. Goodrich, 175 Mich. 168, 141 N.W. 882, Ann. Cas. 1915C, 821. These cases are decided under a statute of the state almost identical with our statute (G.S. 1913, § 6450), which provides that:
"If the capital stock of a manufacturing corporation is withdrawn and refunded to the stockholders before the payment of corporate debts for which it would have been liable, the stockholders shall be liable to any creditor, to the amount of the sum so refunded to each of them, respectively * * *."
The Michigan court, however, had no doubt that the dividends could be recovered, indepedently of the statute, as being a fraudulent disposition of assets.
The Federal cases cited, and those from Washington and Michigan, and the Wisconsin case of Atlanta A. & W. Assn. v. Smith, 141 Wis. 377, 123 N.W. 106, 32 L.R.A. (N.S.) 137, 135 Am. St. 42, conceding that a refundment of capital by a corporation may be a fraud on subsequent creditors, show that the authorities are not in accord on the question to be here decided. Let us examine our own decisions, and try to discover to what conclusion they lead.
In Minnesota Thresher Mnfg. Co. v. Langdon, 44 Minn. 37, 46 N.W. 310, plaintiff was the purchaser, at a judicial sale, of "all the assets, property and business of the Northwestern Manufacturing & Car Company," and sought to recover dividends paid by that company to its stockholders out of its capital. It was held that neither the corporation itself, nor its creditors on their own behalf, could recover said dividends, and therefore that plaintiff could not. Though not necessaary to a decision of the case, the court said [page 39] that the right of the receiver of the corporation "to recover these unearned dividends paid to its stockholders by the corporation out of capital cannot be doubted." It appeared in that case that the corporation was insolvent when the dividends were paid, and it is not said that there may be a recovery where the only creditors are those whose claims arose after the payment.
The able and exhaustive opinion of Justice Mitchell in Hospes v. Northwestern Mnfg. & Car Co. 48 Minn. 174, 50 N.W 1117, 15 L.R.A. 470, 31 Am. St. 637, who also wrote in the case last cited, dealt with the right of creditors of a corporation to compel stockholders to pay for "bonus" stock. The doctrine that the capital of a corporation is a trust fund for the payment of its debts was criticized, in effect repudiated. The right of a corporation to use, sell and dispose of its property, was said to be the same as the right of a natural person, and any transfer or conveyance of its property by a corporation is tested by the same rules as is such a transfer by a natural person. If the transfer is in fraud of creditors it is invalid, otherwise...
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