Randall v. Bailey

• Decision Date: 04 June 1942
• Citation: 43 N.E.2d 43,288 N.Y. 280
• Parties: RANDALL v. BAILEY et al.
• Court: New York Court of Appeals Court of Appeals

288 N.Y. 280

43 N.E.2d 43

RANDALL

v.BAILEY et al.

Court of Appeals of New York.

June 4, 1942.

Appeal from Supreme Court, Appellate Division, First Department.

Action by C. Walter Randall, as trustee of the Bush Terminal Company, against Frank Bailey and others, impleaded with others, to recover dividends declared and paid between 1928 and 1932, from directors and executors of deceased directors. From a judgment of the Appellate Division of the Supreme Court entered July 14, 1941, 262 App.Div. 844, 29 N.Y.S2d 512, unanimously affirming a judgment in favor of the defendants entered upon a decision of the court at a Trial Term, Walter, J., without a jury, dismissing the complaint on the merits, 23 N.Y.S.2d 173, the plaintiff appeals by permission after denial of motion for leave to appeal, 262 App.Div. 994, 30 N.Y.S.2d 808.

Affirmed. John M. Harlan, James E. Nickerson, and Ray I. Hardin, all of New York City, for appellant.

Spencer Pinkham, Henry F. Holthusen, and Charles E. Oberle, all of New York City, for Frank Bailey et al., respondents.

David Paine and George Koegler, both of New York City, for Title Guarantee & Trust Co., as ancillary executor of Edward T. Bedford, deceased, respondent.

Arthur Garfield Hays, John Schulman, and Morris Shilensky, all of New York City, for Irving T. Bush, respondent.

CONWAY, Judge.

The plaintiff, as trustee, seeks in this action to recover from directors and executors of deceased directors dividends declared and paid between 1928 and 1932, alleging that they were paid from capital in violation of section 58 of the Stock Corporation Law, Consol. Laws, ch. 59.

The corporation involved is the Bush Terminal Company, hereinafter called Terminal, which was organized in 1902. It owns and operates a great ocean terminal. The land in Brooklyn which it and its wholly owned subsidiary, Bush Terminal Buildings Company, hereinafter called Buildings, purchased between 1902 and 1905, increased in value with the passing years. Until 1915 Terminal and Buildings carried that land at its original cost. In 1915 and again in 1919 they committed to their books a portion of the increase in value of that land. It has not since been increased. The trial court found that its value during the years 1928 to 1932 was greater than the value to which it had been increased upon the corporate books. Those findings have been unanimously affirmed. Even apart from that affirmance, which concludes us, there is no claim that the findings are not correct. Moreover, there is no allegation in the complaint that any director acted fraudulently, in bad faith or negligently in valuing the land or in voting the dividends. The question presented, therefore, is solely one of law and involves the construction of section 58 of the Stock Corporation Law. We are concerned only with the legislative prohibition as evidenced in section 58 as enacted in 1923. If the directors of Terminal were permitted to include among the corporate assets the value of the land at the amount at which it was valued on the books from 1919 onward there was a surplus for the payment of dividends and no recovery may be had in this action. If it must be carried at cost then the directors unjustifiably declared and paid the dividends which plaintiff seeks to recover. The question presented, therefore, is: may unrealized appreciation in value of fixed assets held for use in carrying on a corporate enterprise be taken into consideration by directors in determining whether a corporate surplus exists from which cash dividends may be paid to stockholders.

The original forerunner of section 58 was section 2 of chapter 325 of the Laws of 1825. It will be helpful in ascertaining the legislative intent if we examine that section and the sections which followed, either by way of amendment or substitution, down to the enactment of section 58 in 1923. The accompanying footnote contains the applicable changes from 1825 through the enactment of section 58 in 1923. ^*

The appellant contends that the first sentence of section 58 of the Stock Corporation Law should be divided into two parts; that the first twenty-six words should be applicable to the payment of what he terms regular or ordinary dividends and that the remaining portion of the sentence should be applicable to such dividend as may be declared in connection with a reduction of capital. That construction makes the caluse commencing ‘unless the value of its assets' modify only the second portion.

The appellant points out that in 1912 the Legislature authorized the issuance of stock without par value and provided in section 20 of the Stock Corporation Law, with reference to such a corporation, ‘No such corporation shall declare any dividend which shall reduce the amount of its capital below the amount stated in the certificate as the amount of capital with which the corporation will carry on business,’ L.1912, ch. 351, s 20; and that in 1921 that section was amended to read, ‘No such corporation shall declare or pay any dividend which shall reduce the amount of its stated capital,’ L.1921, ch. 694, s 20. Thus immediately prior to 1923, corporations having only par value stock were governed by the ‘surplus profits' language (Stock Corporation Law, s 28 footnote, p. 45) while those having stock without par value were governed by the ‘amount of stated capital’ language. Appellant then contends that the Legislature intended to eliminate the variation of terminology and the overlapping provisions contained in sections 20 and 28 and accomplished that elimination by the enactment of the first twenty-six words in the first sentence of the new section (s 58) by simply providing that no business stock corporation should distributedividends which should ‘impair its capital or capital stock,’ although the Legislature was in reality continuing the ‘surplus profits' test of former section 28; that the terminology ‘surplus profits' and ‘impairment of capital’ were used to express the same test. He contends that the surplus from which cash dividends may be distributed must be based upon actuall profits and realized gains, over and above the capital investment, after provision has been made in respect of all losses, which, however, must be treated as realized or accrued, although conceding that dividends may properly be paid from paid-in surplus.

We shall first consider appellant's division of the first sentence of section 58 into two parts. Assuming that there may be some justification for that construction as a matter of syntax and statutory history, it seems to us that an equally strong argument may be made to the contrary. The words any dividend are contained in both portions of the sentence. Any is an all-exclusive word. When repeated in the same sentence one would reasonably assume that the two words bore the same meaning each time. Those two words tie together by repetition that first and second portions of the sentence or so it might well be urged. They must mean a dividend of any kind or character and both portions of the sentence must be read in that light. They must mean that no dividend may be declared or paid which shall impair capital or capital stock nor unless the value of the corporate assets ‘remaining after the payment of such dividend, or after such distribution of assets, as the case may be, shall be at least equal to the aggregate amount of its debts and liabilities including capital or capital stock as the case may be.’

That reasonable men may differ upon the syntax of the sentence under discussion is made apparent by an allegation contained in each of the causes of action in the plaintiff's complaint. It reads as follows: ‘The declaration and payment of said dividends impaired the capital and capital stock of Terminal; and the value of the assets of Terminal remaining after said payment was less, by an amount in excess of such payment, than the aggregate amount of the debts and liabilities of Terminal including its capital or capital stock; and, both at the time such dividends were declared and at the time they were paid, the capital and capital stock of Terminal was impaired and the declaration and payment of said dividends further impaired said capital and capital stock * * *.’

There is other evidence, well nigh conclusive, that the Legislature intended to drop the ‘surplus profits' test, apart from the internal evidence contained in section 58 itself. In 1924 two subdivisions of section 664 of the Penal Law were amended. Prior to that year the Penal Law, Consol. Laws 1909, c. 40, provided that a director was guilty of a misdemeanor who concurred in any vote: ‘1. To make a dividend, except from the surplus profits arising from the business of the corporation, and in the cases and manner allowed by law * * *.’ In 1924 that subdivision was amended to read: ‘1. To make a dividend, except from surplus, and in the cases and manner allowed by law * * *.’ L.1924, ch. 221.

Subdivision 5 of the same section had read: ‘To apply any portion of the funds of such corporation, except surplus profits, directly or indirectly, to the purchase of shares of its own stock.’ That subdivision was amended in 1924 to read: ‘To apply any portion of the funds of such corporation, except surplus, directly or indirectly, to the purchase of shares of its own stock.’ L.1924, ch. 221.

Again, we are concerned with the legislative will as written in the statute. We should construe the statutory language as the average business man would read and understand it. He is the one who must bear the burden civilly and criminally. If the Legislature had intended to continue the ‘surplus profits' test it would have said so clearly and unmistakably rather than by using the words ‘impair its capital or capital stock.’ While it is true that punctuation is no part of a writing, it also may not be amiss to point out that there is no semicolon separating the two portions of the sentence in question. We think that a fair reading...