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. In analogy to the rule in respect of a stockholder who had not paid the full amount of his subscription, it has been held that an innocent stockholder who receives dividends improperly declared out of capital, but without knowledge on his part of its source, may, while the corporation is solvent, be compelled to return such dividends, irrespective of whether or not they are necessary to satisfy the company's liability, since the action is at law in which the equitable defenses are not available to the stockholder; but, after

260a Gaunce v. Schoder Wash. 604, 261 Pac. 293. receiver.)

(1927) 145 (Action by

261 While a co-operative corporation is within the prohibition of the Wisconsin statute, prohibiting the declaration of dividends except from net profits, and expressly making every stockholder receiving any dividend so paid liable to restore the same, yet, where such a corporation merely makes the customary trade discount which is given by stores generally in that vicinity to their customers, such discount being given in merchandise to all customers whether members of the association or not, there is no payment of a dividend within the meaning of the statute rendering the stockholders liable to repay the same. Breon v. Genger (1924) 182 Wis. 616, 197 N. W. 195.

It is immaterial as regards the liability of stockholders to refund dividends wrongfully paid, that the stockholders themselves authorize and direct the board of directors to make the payment, it being the mutual mistake which the law seeks to rectify, and the formal manner of its commission is immaterial. Grant v. Ross (1896) 100 Ky. 44, 37 S. W. 263.

The transferee of stock who has received an unlawful dividend paid by an insolvent corporation does not free himself from liability therefor by paying over the money to his transferrer. Fin v. Brown (1891) 142 U. S. 56, 35 L. ed. 936, 12 Sup. Ct. Rep. 136.

And the liability of a stockholder to refund dividends wrongfully declared and received by him continues after his transfer of his stock to another, notwithstanding a statute declaring that "every person becoming a shareholder [by a transfer of shares of stock on the books of the corporation]

insolvency, such stockholder may only be sued in an equitable action, where, as a condition precedent, it has been determined, after notice and hearing, what proportion of the dividends he has received are necessary to go into the trust fund for the satisfaction of creditors' claims and costs of receivership.2 260a

Other decisions of a miscellaneous nature, involving the obligation of a stockholder to restore dividends wrongfully paid, are set out in the footnote.261

shall, in proportion to his shares, succeed to all the rights and be subject to all the liabilities of prior shareholders." Hurlbut v. Tayler (1885) 62 Wis. 607, 22 N. W. 855.

But that one who owned corporate stock at a time when a dividend was mistakenly declared upon it is not liable for the amount to the corporation, if before its payment he transfers the stock to another, to whom the dividend is paid, see Allith-Prouty Co. v. Wallace (1925) 32 Wyo. 392, 39 A.L.R. 513, 233 Pac. 144, 234 Pac. 504.

Where a stockholder transfers her stock to her husband, who is president and general manager of the company, in order merely to enable him to act more conveniently and completely as her agent, and there is no real change of ownership of the shares, she is chargeable with the knowledge possessed by him of the condition of the company, such knowledge being within the scope of the agency, and cannot successfully claim as an innocent stockholder receiving dividends in good faith under the belief that they were properly paid, so as to avoid liability to refund dividends thereafter wrongfully paid from the capital, and not from earnings. E. L. Moore & Co. v. Murchison (1915) 141 C. C. A. 435, 226 Fed. 679.

And it has been held that the knowledge of one who holds stock in trust, and is also an officer and director of the corporation, as to its financial condition, will be imputed to the cestui que trust, so that the latter cannot be permitted to retain capital of the corporation paid to him as dividends, on the ground that he had no personal knowledge that the payment was not from surplus or earnings. Rheinstrom v. Seasongood (1917) 19 Ohio N. P. N. S. 393, 27 Ohio Dec. 430.

In some of the English cases where it was sought to recover from directors dividends which they had received, it is difficult to determine whether the court regarded the suit as one to hold the directors liable as such, or merely

The decision in Dielmore Valve Co. v. McLaren (1924) 128 Wash. 242, 222 Pac. 498, that 'stockholders were not liable to the corporation for a dividend which it was alleged had been paid from capital, is based on the insufficiency of the evidence to show that the dividend was paid from capital instead of profits, the company having on hand a cash balance sufficient to pay the dividend, while the evidence relied on to show a bookkeeping deficit was that of an expert bookkeeper, who, without any knowledge of the company's business, the value of its patent rights, or any of its other property, arbitrarily set down a figure for depreciation, the actual amount of which was not otherwise shown.

The fact that a stockholder who has received dividends paid from capital instead of surplus is a preferred stockholder has been held immaterial as regards the right of the trustee in bankruptcy of the corporation to recover the dividends, the statute which prohibited generally the making of dividends except from surplus referring to dividends of all kinds. Mente v. Groff (1910) 10 Ohio N. P. N. S. 148.

It has been held, also, that a statute declaring that in no event shall the holder of preferred stock be individually or personally liable for the debts or other liabilities of the said corporation, excepting debts for labor, does not exempt a preferred stockholder from liability to account for dividends received, under a statute which provides that if the capital stock of any such corporation shall be withdrawn and refunded to the stockholders before the payment of all the debts of the corporation for which such stock would have been liable, the stockholders of such corporation shall be jointly and severally liable to any creditor of such corporation, in an action. founded on the statute, to the amount of the sum refunded to him or them respectively. American Steel & Wire Co. v. Eddy (1902) 130 Mich. 266, 89 N. W.952.

A statute of Maine giving a judg

one to compel restitution of dividends improperly paid, as from an ordinary. stockholder; and the view has been taken that the right to recover dividends paid a director stands on the same basis as the right to recover ment creditor a bill in equity in the supreme court of the state to reach dividends improperly paid has been held not to exclude jurisdiction of the Federal circuit court to entertain a bill, where the allegation as to the citizenship of the parties is sufficient, to recover from a stockholder assets illegally paid as dividends at a time when the corporation was insolvent. Bowker v. Hill (1879; C. C.) 115 Fed. 528.

Where a receiver of a building and loan association petitioned for instructions in regard to dividends alleged to have been paid to holders of certain stock, and the court found that the dividends had been illegally and wrongfully paid, and ordered the receiver to take steps to recover the same as part of the assets of the corporation, it was held in Stewart v. Marion Trust Co. (1900) 155 Ind. 174, 57 N. E. 911, that the order was interlocutory merely, and not appealable; and that an appeal would not lie from the action of the court refusing to vacate the order.

As to the right of a corporation to recover from a stockholder his proportionate part of a dividend paid to him, on the ground that the same was paid under mistake of fact, without having taken into consideration an unexpected and subsequently enacted Federal income tax law, which it was claimed was retroactive, see Overland Sioux City Co. v. Clemens (1920) 189 Iowa, 1293, 179 N. W. 954, denying recovery where the statute did not require payment out of any specific fund, and it was not shown that, in order for the company to pay the tax, it must encroach on its capital.

Holders of unpaid stock in a foreign corporation cannot defeat an action by its trustee in bankruptcy to set aside a fraudulent dividend applied in satisfaction of their subscriptions, and compel their payment, on the theory that it is an attempt to regulate the internal affairs of such corporation, which is not a party to the proceeding, where all solvent stockholders are parties, since the corporation and creditors are represented by the trustee,

other dividends.262 The English cases, so far as the question involved seems to turn chiefly on the liability of the defendant as a director, are set out elsewhere in the annotation.263

The question of the liability of stockholders who have received dividends, to reimburse directors of the corporation who have been held liable

and all necessary parties are, therefore, before the court. Edwards v. Schillinger (1910) 245 Ill. 231, 33 L.R.A. (N.S.) 895, 137 Am. St. Rep. 308, 91 N. E. 1048. See in this connection annotations in 18 A.L.R. 1383, and 32 A.L.R. 1353, as to jurisdiction of actions or proceedings involving internal affairs of foreign corporations, particularly subdivision III. b, 8, relating to dividends.

262 Where dividends paid out of capital, in violation of the articles of the company, were received by a director in good faith, relying on the other officers and directors, and without participation by the director, in the declaration of the dividends or the preparation of the deceptive balance sheet and report recommending the dividends, it was held in Re Denham & Co. (1883) L. R. 25 Ch. Div. (Eng.) 752, that he could not be held liable to creditors of the company on its liquidation, even for the dividends which he himself received on his own stock. The court took the view that no distinction could be made between dividends paid shareholders and dividends paid the directors, where there was no fraud, and the director relied on representations such as those made in this instance.

Where the directors of a company organized to carry on trading with the Confederacy during the Civil War in this country, by running the blockade, took too sanguine a view as to the prospect of success of the company, after it had operated at a profit for some time, and, acting in good faith, proposed a dividend out of profits, which recommendation was adopted by the shareholders at a general meeting, it was held in Stringer's Case (1869) L. R. 4 Ch. (Eng.) 475, that there could be no recovery from the managing director of the amount of dividends received by him on his shares, when three years later, the Confederacy having collapsed and its obligations to the company, which had

for wrongful declaration of dividends, is considered also in another connection.264

c. Who may enforce liability.

1. Corporation or its assignee. Generally it has been held that the corporation,265 or its assignee,266 may maintain an action to recover from

been valued as assets, having become worthless, the company was wound up at the instance of a creditor. The articles of association forbade the payment of dividends except out of the profits arising from the business.

See also English cases in notes 177 and 212, supra.

263 See IX. a, supra.

264 See note 240, supra.

265 Main v. Mills (1874) 6 Biss. 98, Fed. Cas. No. 8,974; Hayden v. Thompson (1895) 17 C. C. A. 592, 36 U. S. App. 361, 71 Fed. 60; Lexington Life, F. & M. Ins. Co. v. Page (1856) 17 B. Mon. (Ky.) 412, 66 Am. Dec. 165; Salina Mercantile Co. v. Stiefel (1910) 82 Kan. 7, 107 Pac. 774; Grant v. Ross (1896) 100 Ky. 44, 37 S. W. 263; Detroit Trust Co. v. Goodrich (1913) 175 Mich. 168, 141 N. W. 882, Ann. Cas. 1915A, 821; Gager v. Paul (1901) 111 Wis. 638, 87 N. W. 875.

A right of action accrues to the corporation on the wrongful receipt by a stockholder of a dividend made when there were no profits, because of the reduction of its capital stock, which it is bound to keep whole. Main v. Mills (Fed.) supra.

Either the corporation or its receiver may maintain an action to recover dividends declared and paid at a time when it was insolvent. Hayden v. Thompson (1895) 17 C. C. A. 592, 36 U. S. App. 361, 71 Fed. 60.

Dividends made in good faith under a misconception of what constituted the profits of the company out of which the board of directors were authorized to make dividends may be reclaimed by the corporation, because the stockholders who received them were not entitled to them and they were paid over and received under the operation of a mutual mistake. Lexington Life, F. & M. Ins. Co. v. Page (1856) 17 B. Mon. (Ky.) 412, 66 Am. Dec. 165.

Where the directors of a corporation intended to distribute only its accrued profits, but a stockholder, by wilfully deceiving them as to the sur

stockholders dividends illegally paid to them out of capital. But in a Minnesota case 267 this right was denied; and it was accordingly held that, inasmuch as the corporation itself, in its plus on hand, induces them to declare and pay a dividend the effect of which is to reduce the amount of the invested capital, he thereby fraudulently obtains from the company the sum by which his own share in the distribution has been increased by such misrepresentation, and is liable to it in at least that amount. Salina Mercantile Co. v. Stiefel (1910) 82 Kan. 7, 107 Pac. 774.

In Detroit Trust Co. v. Goodrich (1913) 175 Mich. 168, 141 N. W. 882, Ann. Cas. 1915A, 821, it is said that, as between the corporation and its stockholders, where all stockholders are upon the same footing, the doctrine of estoppel might be invoked, but that even then the action might be maintained by the corporation upon the theory of mistake

In Gager v. Paul (Wis.) supra, it was held that the liability of a stockholder in an insolvent bank, to refund dividends paid at a time when the corporation was actually insolvent, is to the corporation, and enforceable by it, the court saying that the dividends received by a stockholder contrary to law are but property of the corporation unlawfully taken into the possession of another, and upon every principle of law and every reason of its policy the owner should have the right to recover it by direct action. The court remarked, however, that this view in no wise militates against the right of one interested either as creditor or stockholder to invoke the aid of a court of equity to compel restitution of such unlawful dividends, when the corporation will not reclaim them, but that, when he does so, he merely enforces the right that the corporation has, and the relief granted must be measured by that right.

266 Dividends declared under a mistaken belief that sufficient assets will remain to discharge all corporate debts may be recovered by the corporation, or by its assignee for the benefit of creditors, if the deed of assignment is sufficiently comprehensive to embrace such claim. Grant v. Ross (1896) 100 Ky. 44, 37 S. W. 263.

own right, could not maintain an action against its stockholders for dividends declared and paid out of capital, the right to recover such dividends did not pass by a sale under the order of

And it has been held that the right which the corporation had to recover from stockholders dividends wrongfully declared and received by them passed to the trustee in a deed of trust executed by the corporation, transferring to him as trustee all of the corporate property of every description, whether real, personal, or mixed, open accounts, or other claims or choses in action wherever situated, and that this was true even if at the time the deed was executed the parties were all of the opinion that the dividends had been legally declared. Lexington Life, F. & M. Ins. Co. v. Page (Ky.) supra.

267 Minnesota Thresher Mfg. Co. v. Langdon (1890) 44 Minn. 37, 46 N. W. 310. It was said: "In the present case it is not alleged that the payment of these dividends was the unauthorized act of some corporate agent. On the contrary, it is alleged that the corporation itself declared and paid them. Neither is it alleged that they were paid under a mistake of fact, or by reason of any fraud on part of the defendants against the corporation. The right to recover is rested on the single, bald fact that they were unearned, and hence paid out of the capital. We have been referred to no case, and have found none, which holds that on such a state of facts the corporation, in its own right alone, could recover back money thus voluntarily paid by it to its stockholders.

The only American case which even seems to lend any aid to plaintiff's contention is Lexington Life, F. & M. Ins. Co. v. Page (Ky.) supra. What is there said on the subject is obiter, and all that it amounts to is that dividends paid under the operation of mutual mistake may be recovered back by the corporation, a proposition which is probably true; but whether the application sought to be made of it to the facts of that case was a proper one may admit of doubt. Our conclusion is that the corporation itself, in its own right, could not have maintained any action against the defendants for the recovery of these dividends; that the receiver could do so, not in the right of the corporation, but only in the right of creditors."

the court, of. "all the assets, property, and business" of the corporation.

It has been held, also, that the corporation, or its assignee, may maintain an action against directors to recover dividends wrongfully declared and paid by them out of capital.268 Thus, it has been held 269 that the unlawful payment of dividends to the stockhold

268 In holding that the corporation may maintain a suit to compel the directors to account for dividends which they have knowingly declared out of capital, the court in Loan Soc. v. Eavenson (1915) 248 Pa. 407, 94 Atl. 121, said: "The contention of the defendants that the bill cannot be maintained because it was brought by the corporation, and the money received by the stockholders as dividends was nothing more than the pro rata distribution of capital among them for which they cannot claim to be reimbursed, is not tenable. This suit is by the corporation, which seeks, under a new management, to reinstate the capital, seriously impaired by the illegal acts of the defendants as directors, and then to continue the business. The corporation, therefore, represents the interests of the creditors as well as the present shareholders, and it may become necessary in the future, if not at the present, to use the capital for payment of debts. The well recognized distinction between the shareholders and the corporation will permit a suit by the latter when the former would not be heard to complain. If this were an action by the holders of the stock they could not compel the former directors to replace the part of the capital they had already received by way of dividends. But the corporation is a going concern, and is not in liquidation, and hence its rights as well as its duty to compel the replacement of its capital. This is necessary for the protection of creditors in the future, as well as the present stockholders, who may not be the persons to whom the dividends were paid five years ago."

And it has been held that the corporation may maintain an action on its own behalf to recover from directors their statutory liability for wrongful declaration of dividends, the right to maintain the action not being limited to creditors of the corporation, where the statute declares

ers of a state bank when the bank is known by them to be insolvent constitutes a violation of the duties of the directors, redress for which must be sought by the corporation itself, or by its representative, for the benefit of the bank; and that a depositor cannot maintain an action to recover from a director dividends so wrongfully that directors of corporations must not make dividends except from the surplus profits arising from the business thereof, nor divide, withdraw, or pay to stockholders. any part of the capital stock, and that for a violation. of the statute they should be individually, jointly, and severally liable "to the corporation, and to the creditors thereof," to the full amount of the capital stock so divided or with-drawn. Southern California Home Builders v. Young (1920) 45 Cal. App. 679, 188 Pac. 586.

It was held, also, in Southern California Home Builders v. Young (Cal.) supra, that directors could not suc-cessfully defend an action by the corporation in its own behalf to enforce the statutory liability for wrongfully declaring dividends otherwise than out of surplus profits, on the ground of estoppel of the corporation and of its stockholders who participated in the dividends, no special facts being alleged except that stockholders had accepted dividends and had not complained; since mere consent or silence on the part of stockholders, unaccompanied by any other facts which might present equitable considerations, will not operate as a ratification or an estoppel, and there is nothing inherently inequitable in enforcing such liability.

Under a statute imposing a personal liability on directors of a corporation for impairing the capital stock by declaring dividends, it was held in Gunkle's Appeal (1864) 48 Pa. 13, that, when a bank made a general assignment, liabilities of the directors became vested in the assignee, who was bound to collect them, as well as any other assets of the bankrupt.

See also Stroud v. Lawson, note 274; Re Oxford Ben. Bldg. & Invest. Soc. and Flitcroft's Case (Eng.) note 304, infra.

269 Frederick v. McRae (1923) 157 Minn. 366, 196 N. W 270.

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