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tee in bankruptcy of a corporation may maintain an action to enforce the liability of directors for declaring dividends out of capital, in violation of the New York statute, making directors under whose administration the violation of the act occurred liable to the corporation, and to its creditors, to the full amount of any loss sustained by them by reason of such withdrawal or division of capital.

6. Miscellaneous.

It has been held that a garnisher of a debt owing by the corporation may recover dividends wrongfully paid by it;302 also that a lessor to whom the corporation under the terms of its lease is under liability, absolute, or contingent, may hold directors to account for declaring dividends out of capital.303 It has been held in England that the liquidator of the compa

302 One who has garnished a debt owed by a corporation, and has recovered a judgment in the garnishment proceedings against the corporation, may recover dividends paid by it where the original debtor might have done so, his rights relating back to the inception of those of his debtor. Montgomery v. Whitehead (1907) 40 Colo. 320, 11 L.R.A.(N.S.) 230, 90 Pac. 509.

303 City Investing Co. v. Gerken (1922) 200 App. Div. 503, 193 N. Y. Supp. 271, later appeal in (1923) 121 Misc. 763, 202 N. Y. Supp. 41.

304 In Re Oxford Ben. Bldg. & Invest. Soc. (1886) L. R. 35 Ch. Div. (Eng.) 502, the court regarded the proposition as settled by the authorities that the liability of directors to repay dividends improperly declared by them out of capital might be enforced by a creditor of the company or by the liquidator thereof, under statute, or by the company itself, before a winding up; and that the acquiescence of the shareholders did not affect the creditors in such a case.

Where dividends were paid on the recommendation of directors of the company, who made reports as to its condition which were substantially untrue, it was held in Flitcroft's Case (1882) L. R. 21 Ch. Div. 519, 16 Eng. Rul. Cas. 263-C. A., that the company, or its liquidator, was not precluded from recovering the amount of

121

ny, among others, may maintain an
action to enforce the liability of direc-
tors for wrongfully declaring or rec-
divi-
ommending the payment of
dends.304 But where all the debts of a
bank in process of liquidation have
been paid, so that the liquidator rep-
resents shareholders only, he has no
right in that capacity to maintain an
action to compel a director to refund
dividends alleged to have been paid
from capital and received by the share-
holders.305
However, in a Canadian
case306 the view is taken that the
liquidator of a corporation is not pre-
cluded from recovering dividends de-
clared and paid out of capital in vio-
lation of the statute, although all of
the creditors are paid, on the theory
that recovery is for the benefit merely
of the shareholders who have received
the dividends, where the statute de-
clares that no dividend shall be de-
the dividends from the directors, on
the theory that the shareholders had
ratified the wrongdoing of the direc-
tors, since the wrongful act in paying
dividends out of capital could not be
ratified, and the payment was to the
shareholders individually, while re-
covery would be for the benefit of the
corporation and its creditors.

305 City of Glasgow Bank v. Mackinnon (1882) 9 Sc. Sess. Cas. 4th series, 535. See note 272, supra.

And it is held in Turquand v. Marshall (1869) L. R. 4 Ch. (Eng.) 376, that the liquidator of a bank, suing on behalf of the company, cannot hold directors liable for money improperly paid out in dividends, since directors should not be asked to pay over again to the shareholders what they had already received in dividends.

306 Stavert v. Lovitt (1908) 42 N. S. 449. It was said that there was nothing in the statute to suggest the theory that, because there were no creditors and the money recovered would go to those who had received the dividend improperly paid, these facts might be pleaded in bar to an action not concerned with the use to be made of it, or with the question into whose pockets the money might ulthat the contention timately go; urged, if accepted, would in effect repeal the statute, or at least paralyze its operation in a case like that before the court.

clared so as to impair the paid-up capital, and that directors who knowingly and wilfully concur in the declaration of any dividend whereby the capital is impaired shall be jointly and severally liable for the amount of such dividend as a debt due to the corporation.

d. Pleadings; parties to actions; multifariousness, and improper joinder. Questions as to pleadings and parties in suits to restrain the payment of dividends, or to compel such payment, are treated elsewhere in the annotation.307

The question of negligence of trustees of a corporation in declaring a dividend which diminishes the amount of the capital stock, so as to render them liable to the corporation at common law, must be raised by the pleadings in order to hold them liable on this ground; and, if a complaint merely alleges fraud and false representations, and it is found that there was no fraud, and that they acted in good faith, they cannot be held liable.308 But a stockholder suing to enforce the statutory liability of directors for declaring dividends out of capital stock, instead of surplus, is not required to allege that the directors knowingly made the dividend from capital, where the statute declares that it shall not be lawful for directors to make dividends except from surplus profits, or to divide or withdraw any part of the capital stock, and makes no reference to scienter, although perhaps, if they made diligent examination and were misled by false entries in the books, or other erroneous information upon which they might fairly rely, the same might excuse their action in dividing capital, instead of profits; but it devolves on them in any event to show such excuse.309 And an allegation in a declaration by a stockholder to enforce the statutory liability of directors for declaring a dividend out of capital instead of surplus, that the

307 See note 351, infra.

308 Excelsior Petroleum Co. v. Lacey (1875) 63 N. Y. 422.

309 Gaffney v. Colvill (1844) 6 Hill (N. Y.) 567.

810 Ibid.

value of the plaintiff's stock was depreciated thereby in a certain sum, is a sufficient allegation of a loss to him to sustain the suit, without an averment as to the manner in which the alleged illegal act caused a depreciation in the value of the stock, under a statute forbidding directors to declare a dividend except from the surplus profits, or to divide or withdraw any part of the capital stock, and declaring that directors violating the statute should be personally liable to creditors and stockholders, respectively, to the full extent of any loss which they sustain from such violation.310

An allegation in a declaration seeking to hold directors liable for a declaring of dividends out of capital, in violation of statute, that the directors caused a dividend to be made to the stockholders, has been held insufficient as against a special demurrer, since no one can make dividends except the directors, and they cannot cause it to be done by others; the allegation in such a case should be that the directors made a dividend.311 And an allegation to the effect that in a certain year directors of a bank declared and paid to stockholders dividends in excess of the earnings for that year shows no liability on their part, in the absence of allegations that dividends were improperly paid or were not paid out of earnings of the bank made during prior years.312

It has been held in California that if in any case good faith on the part of the directors of a corporation in declaring dividends from capital, instead of from surplus profits, may be considered as a defense in a suit to recover the statutory liability, this would only be true where the pleadings clearly and in detail show the fact of fraud and deceit practised upon the directors, and further show facts from which the conclusion would follow irresistibly that the directors could not have guarded against such fraud.313

311 Ibid.

312 Council v. Brown (1921) 151 Ga. 564, 107 S. E. 867.

313 Southern California Home Builders v. Young (1920) 45 Cal. App. 679, 188 Pac. 586.

Several cases involving questions of a miscellaneous nature relating to pleadings in suits brought to hold directors liable for wrongful declaration of dividends, or to recover such dividends from stockholders, are set out in the footnote.314

It has been held that a corporation is a necessary party to a suit to require stockholders to account for dividends received out of capital, as otherwise the corporation would not be concluded by the decree, and the defendants might be called on a second time to account for the same assets at the suit of the corporation or its receiver.315 It has been held, also, that a corporation is a proper party to an

314 As to the necessity for pleading insolvency at the time dividends were declared and paid, see note 203, supra.

An averment in a bill seeking to hold directors of a corporation personally liable for wrongful declaration of dividends, that, because of illegal dividends which the said directors declared, greatly to their own benefit and in fraud of creditors of the corporation, the capital stock was largely impaired, has been held to be merely an allegation of the pleader, and insufficient to show fraud, so as to hold the directors personally liable for such dividends to creditors or stockholders. Blythe v. Enslen (1922) 209 Ala. 96, 95 So. 479.

It is held in Davenport v. Lines (1905) 77 Conn. 473, 59 Atl. 603, that the complaint in an action brought by a receiver against the directors of an insolvent corporation stated no other cause of action than one to recover damages for an alleged fraudulent diversion of its funds in the payment of dividends, and, if not based on the statute in that state, could not be maintained without proof of fraud or bad faith on the part of the direct

ors.

As to the right, in a suit by a stockholder to compel directors of a corporation to pay over to the corporation moneys claimed to have been lost by their negligence, and also the amount of several dividends which were paid under their direction during a number of years when there were no surplus earnings out of which the dividends could properly be declared, to require the plaintiff to serve an

action to enforce the statutory liabil ity of directors or officers of a corporation for declaring dividends when the company is insolvent or when the payment of the dividend would render it insolvent.316 And in a New York case 317 it is held that, as a cause of action by a creditor of a corporation to recover from directors the amount of dividends paid out of capital is a derivative one, prosecuted for the benefit of the corporation, the corporation is a necessary party defendant. But, in an action under the Pennsylvania statute by a creditor against the directors of a corporation for paying a dividend when the corporation was insolvent, it was held 318 that the coramended complaint separately stating and numbering the facts constituting each cause of action, where the plaintiff claims that the complaint states but one cause of action and the defendants claim that several causes of action are stated, viz., a cause of action for negligence or nonfeasance, and several causes of action for misfeasance for wrongfully paying dividends in each of the several years, see Weed v. First Nat. Bank (1905) 106 App. Div. 285, 94 N. Y. Supp. 681, holding that the motion should have been denied, since the plaintiff should not be compelled to divide what he claims is but a single cause of action, and, if causes of action were improperly united, the question should be raised by demurrer.

315 First Nat. Bank v. Smith (1879; C. C.) 6 Fed. 215; Dormitzer v. Illinois & St. L. Bridge Co. (1881; C. C.) 6 Fed. 217; Lathrop, S. & H. Co. v. Byrne (1906) 115 App. Div. 846, 100 N. Y. Supp. 1041. See in this connection note 370, infra.

316 Swartley v. Oak Leaf Creamery Co. (1907) 135 Iowa, 573, 113 N. W. 496.

317 Island Paper Co. v. Carthage Timber Corp. (1926) 128 Misc. 246, 218 N. Y. Supp. 346.

318 Archer v. Rose (1869) 3 Brewst. (Pa.) 264.

It is held, also, in Hill v. Frazier (1853) 22 Pa. 320, that the corporation need not be joined as a party defendant in an action by a creditor to enforce the liability of a director, under a statute making directors consenting to a dividend greater than the net profits of the company liable as in

poration need not be made a party defendant, the directors being sued as wrongdoers, and being liable as principals, and having no recourse over. It has been held 319 that, in an action by a receiver against directors of a bank for negligence in the management of its affairs, consisting in part in the declaration and payment of dividends when there were no profits out of which the same could properly be declared, it is not necessary to make all of the directors parties defendant, as the action is not based upon contract, but is for breach of duty and arises ex delicto. So, where several unlawful dividends are declared or other wrongful acts committed by the directors, and the board of directors does not remain the same during the entire time, a receiver of the corporation, in suing directors for the unlawful declaration of dividends, is not bound to include in the same bill all of the directors who participated in any of the alleged wrongful acts, but may maintain the suit against those alone who were directors during the entire period in which the wrongs were committed.320 And an action may be maintained by stockholder against a single director to enforce the statutory liability for declaring dividends out of capital instead of surplus, where the statute, after declaring that directors should not declare dividends except from surplus profits, provides that "every director who shall violate or be concerned in violating" any prodividuals for all the debts of the company then existing or contracted while they remained in office.

319 Coddington v. Canaday (1901) 157 Ind. 243, 61 N. E. 567.

320 Gaither v. Bauernschmidt (1908) 108 Md. 1, 69 Atl. 425. It was held in this case that the dismissal from the case of certain directors who were not such during the entire time did not operate to deprive the remaining directors of any right they might have for contribution; that, however desirable it might be to avoid a multiplicity of suits and to do complete justice to as many of the parties as possible in one litigation, the rules of equity pleading forbidding the uniting in one bill of defendants some of

vision of the act shall be liable personally to creditors and stockholders, respectively, to the extent of any loss sustained by them.321 The question of the right of directors whom it is sought to hold liable for declaration of dividends out of capital, to have shareholders made parties defendant, is involved in cases cited elsewhere in the annotation.321a

The question whether an individual creditor of the corporation may maintain a suit to recover dividends wrongfully paid out of capital, without joining the other creditors, is considered in another connection.322 It has been held that the liability of a stockholder to a creditor of the corporation to refund a part of the capital which he has received without retention of sufficient assets to pay debts is independent of that of the other stockholders, and that they need not be made parties to the suit.323 But in a New Jersey case324 the court took the position that stockholders who may be called upon to make contribution should all be made parties unless a good reason exists to the contrary.

Under the Wisconsin statute all of the liabilities of officers, stockholders, and directors of a corporation which can be enforced for the benefit of creditors of the corporation generally or as a class, may be dealt with in a single suit, and are so connected with each other as to constitute but one cause of action, so that the statutory liability of directors and stockholders

whom are not interested in the whole relief sought should not be disregarded; and that the contention, therefore, could not be sustained that the receiver should have retained in the case as defendants all those of the directors who participated in the greater number of the negligent and unlawful acts complained of, in order that there might be a final settlement of the rights of all of the parties. 321 Gaffney v. Colvill (1844) 6 Hill (N. Y.) 567.

321a See note 240, supra.

322 See notes 299 and 299a, supra. 323 Kimbrough v. Davies (1913) 104 Miss. 722, 61 So. 697.

324 Williams v. Boice (1884) 38 N. J. Eq. 364.

for paying dividends before all of the stock is paid in, or when the corporation is insolvent or in danger of insolvency, or for return of dividends unlawfully paid, are to be enforced in a single suit in equity, and such a suit is exclusive of all other actions on behalf of the creditors of the corporation, who must seek their remedy

325 Williams v. Brewster (1903) 117 Wis. 370, 93 N. W. 479; Hurlbut v. Marshall (1885) 62 Wis. 590, 22 N. W. 852.

326 As to multifariousness, see also note 375, infra.

In Prudential Loan Soc. v. Mayer (1916) 25 Pa. Dist. R. 885, it was held that a bill in a suit brought by a corporation against directors for negligence and mismanagement, including declaration and payment of dividends when there were no profits, and praying for discovery, accounting, and a decree for payment of sums found to be due by reason of losses and impairment of the capital stock, was not multifarious, where it appeared from the bill that all of the directors were in office when some of the alleged dividends were declared, and some of the directors were in office when all of the dividends were declared.

The objection that the bill was multifarious was overruled in Williams v. Boice (N. J.) supra, where suit was brought by the receiver of a bank against the stockholders who had received the dividends and were still living, and against the personal representatives of those who were dead, the court taking the view that all of the stockholders were necessary, or at least proper parties.

But it is held in Emerson v. Gaither (1906) 103 Md. 564, 8 L.R.A. (N.S.) 738, 64 Atl. 26, 7 Ann. Cas. 1114, later appeal in (1908) 108 Md. 1, 69 Atl. 425, that a bill seeking to hold several directors of a bank liable for losses caused by unlawful loans and dividends extending over a series of years, during some of which a portion of the defendants were not members of the board of directors, and were in no way responsible for the losses, is multifarious.

It was held also, however, in Emerson v. Gaither (Md.) supra, that one of the defendants who was a director during all of the time that the illegal acts were alleged to have occurred was not in a position to demur to the

therein, and the suit cannot be discon-
tinued before final judgment, without
the consent of every creditor who
chooses to appear and prosecute.325

Questions as to whether the bill was multifarious, or whether there was an improper joinder of causes of action or of parties, are set out in the footnote.326

bill on the ground that it was multifarious, the rule being that a bill may be multifarious as to some, and not as to others, and that the defect as to the former is not a ground of objection by the latter.

It was held in Bennett v. Clay County Bank (1917) 80 W. Va. 554, 93 S. E. 353, that the bill was multifarious, and incurable by amendment, where the same was brought by a trustee in bankruptcy of a corporation, and had for its purpose two causes of action bearing no substantial connection with or relation to each other, -one to enforce the statutory liability of a stockholder of a corporation for dividends illegally and fraudulently paid to him, and the other to relieve the assets from the effect of a decree in favor of a bank against the corporation as garnishee for dividends alleged to have been so declared in favor of the same stockholder on its admission of liability to him therefor.

It has been held that a cause of action for deceit, brought against directors of a corporation on the ground that they induced the plaintiff to be

come

a shareholder by false representations, including the unlawful payment of dividends out of capital, cannot be joined with a cause of action on the part of the same shareholder, suing on behalf of himself and recover the other shareholders, to dividends so paid out of capital, on the ground that such payment was ultra vires. Stroud v. Lawson [1898] 2 Q. B. (Eng.) 44-C. A. It was held that the case was not within the meaning of a rule providing that all persons might be joined in one action as plaintiff in whom any right to relief in respect of or arising "out of the same transaction" or series of transactions was alleged to exist, where, if such actions, persons brought separate "any common question of law or fact would arise."

The right to join the statutory cause of action existing on the part of the stockholder against directors, for re

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