United States Smelting Co. Picher Lead Co. v. Hofkin
| Decision Date | 18 November 1919 |
| Docket Number | 1703. |
| Citation | 261 F. 546 |
| Parties | UNITED STATES SMELTING CO. (PICHER LEAD CO., Interveners) v. HOFKIN et al. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
See also, 245 F. 896.
R Stuart Smith, of Philadelphia, Pa., Philip W. Russell, of New York City, and Morgan, Lewis & Bockius, of Philadelphia, Pa for plaintiff.
A. L Moise, of Philadelphia, Pa., for intervener Picher Lead Co.
Carr & Steinmetz, of Philadelphia, Pa., for interveners Canada Metal Co. and Adam Hope & Co.
Alfred Aarons and Francis Shunk Brown, of Philadelphia, Pa., for defendants.
This case, in almost every one of its varying aspects, suggests to the mind the inspired saying that 'it is the letter which killeth,' and in some of its aspects the contrasted effects of discarding the letter and being guided alone by the spirit, which gives life to the words of the law. However helpful the quoted phrase may be, because of the wisdom embalmed within it, the lawyer mind is at once admonished that in this case it is the letter to which is due in the beginning all the life which the cause has. This is so, for the reason that, if it were not for the statute, the plaintiff would have no cause of action against these defendants, and we can only know the law which the statute declares from the words employed.
The argument which leads us to disregard the letter of this statute in consequence takes on the appearance of being suicidal. Every line of thought which, by its logical strength, draws us to a conclusion must have a beginning and a starting post to which it can be tied. In this case we have for such beginning the proposition that the defendants were not as individuals the debtors of the plaintiff, nor did they become such from the mere fact that they were the directors of the corporation. If they are now or at any time became debtors, it was not nor is because they were the directors of the debtor company, but because of the provisions of the Pennsylvania statute of April 29, 1874 (P.L. 102, Sec. 39, cl. 5), to the effect that directors shall be liable for the debts of the corporation, if they declare and cause to be paid a dividend when the corporation is insolvent, or the payment of which renders it insolvent. No question is raised over the defendants being within the statute or its application.
The real question involved is presented in the statement of counsel for defendants as one of whether the corporation was at the time of the declaring and payment of this dividend insolvent, or became insolvent as a consequence of such payment. The same question may be differently stated as one of whether the defendants, by the declaration and payment of this dividend, did that thing for which the statute visits upon them liability for the debts of the corporation. We will, because of this concession of the defendants, confine our inquiries to this question.
The facts, baldly stated, are as follows: The American Galvanizing Company had a capital stock of $10,000. The company had been in existence for about 19 months, and was yet to declare its first dividend. It entered into a number of contracts, which began to mature and ripen into debt obligations presently payable about the time the dividend was paid, or very shortly thereafter. The dividend declared, expressed in percentage, was a 500 per cent. dividend. Almost immediately afterwards the company by the act of these same directors, was declared to be insolvent. The conditions then presented were that each stockholder had withdrawn from the assets of the company in this one and only dividend five times what he had invested in it, and there was nothing left for creditors, and all its debts must go unpaid. Add to this the two facts that this total dearth of assets to meet debts followed immediately upon the payment of the dividend, and that the persons who received the dividend were the same individuals who, as directors, had declared it, and at once and by a resistless impulse the face of the inquirer is turned to these directors for some explanation of their conduct, in the absence of which the inference so plainly indicated would force itself upon the mind.
Those who have learned the risk of bad judgment incurred in forming that kind of hasty judgment known as judging from appearances will have in mind the fallacy which is voiced in the phrase 'post hoc propter hoc.' Chronological following, no matter how close, may not be causal consequence, but may be easily mistaken for it. It is no employment of an exaggerated figure of speech, however, to say, as to this occurrence, that not merely insolvency, but the stripping of this corporation of all assets, followed the payment of this dividend, as the thunder clap follows the electric flash.
Without something more appearing than what is above stated, the mind is staggered into an incapacity to entertain any other inference than that which would be drawn. We cannot, in consequence, do otherwise than feel that an explanation is not only looked for; it is imperatively demanded of the directors. This necessity is, of course, felt by the defendants and their counsel, and the explanation is forthcoming. To do it no more than justice, it is not only plausible but does not have the appearance of being the least bit strained. It is, although not expressed by counsel in quite this way, that the defendants have been placed in a false light through a chain of unfortunate, yet altogether unforeseen, happenings which were in fact merely coincidences.
Before the declaration and payment of this dividend the corporation had done a prosperous business, and at that time was in a prosperous condition. It had net assets, including the contributions to its capital, valued at $71,134.99, and a surplus applicable to the payment of dividends of $58,940.85. There is nothing to impeach the integrity of this statement of its financial condition, although, of course, its plant (and properly so) in this balance sheet summary was put at its value as a going concern, and not at its liquidating value as a bankrupt venture. It had outstanding contracts for the purchase of spelter, the raw material which it used in its manufacturing processes. These contracts proved the undoing of the company, as the drop in the price of spelter, which followed the making of the contracts to purchase, entailed a destructive loss upon the purchaser.
It is urged with earnestness, however, that at the time the dividend was declared there was not only nothing to indicate the imminence of a loss, but, on the contrary, much to found the expectation of a profit from these contracts, because the trend of the market prices of spelter was at that time upward. The facts affecting this phase of the inquiry were no sufficiently developed to enable us to make any definite findings. This is because the plaintiff was seeking to get the facts through the cross-examining of the defendants, and proceeded with a noticeable wariness, and the defendants' trial tactics were (as they would be expected to be) dictated by the policy of imposing upon plaintiff the burden of proving its case.
It is not wholly clear whether the purchases of spelter, in the quantities in which it was bought, were speculative or for manufacturing uses, nor is it by any means clear what the promise of the market as to future ranges of prices was at the time the dividend was declared. The plaintiff was in position, however, to have made this last-mentioned feature entirely clear, and, as it had failed to do so, the defendants have a right to the finding (which is now made) that there is no evidence of the price of spelter being below the contract price at the dividend date. The market was, however, so feverish and fluctuating, and the general conditions such, that there could not be said to be any stable market, and the difficulties of securing supplies so great that there was uncertainty in respect to future market conditions affecting the supply and price of spelter, and an even greater uncertainty respecting the prospects of the manufacturing business in which the corporation was engaged. The debts of the company then presently demandable did not exceed $2,200 in amount. The total indebtedness at the time of bankruptcy, a few months afterwards, was many thousands, but none of this (beyond the $2,200) had on the dividend date matured into a presently payable debt, and existed only in the form of obligations resting upon executory contracts in the form of purchases of spelter for future delivery.
The legal proposition upon which, as counsel for defendants view this case, the plaintiff must recover, if at all, is that directors of a corporation cannot, except at the risk of making themselves individually liable for its debts, declare a dividend, if at the time the corporation has outstanding executory contracts carrying a monetary obligation. If this be a correct statement of the legal proposition involved in this case, it is clear that the bill must be dismissed. No such measure of responsibility can be placed upon directors consistently with a wise policy of the law, nor (and because of the unwisdom of such a law) is this the law of Pennsylvania. The words of this act of assembly carry no such meaning, nor is such a meaning in accord with the purpose of the law. That purpose is...
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