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e. Law or equity.

Where it is sought to compel restitution from a stockholder of dividends which he has received, on the ground

covery of dividends paid out of capital, with a cause of action on the part of the stockholder to recover on behalf of the corporation secret profits which the directors were alleged to have made by wrongfully causing the company to purchase securities in which they were personally interested, was denied in Fleisher v. West Jersey Securities Co. (1914) 84 N. J. Eq.-55, 92 Atl. 575. By amendment in 1904 the New Jersey legislature changed the statute under which previously an action was expressly given to a corporation against its directors for the recovery of dividends paid out of capital, so that it was made to apply to wilful or negligent violations of the act, and gave the right of action to the stockholders of the corporation, severally, to the full amount of any loss sustained by them, or, in case of insolvency, to the eorporation or its receiver to the full amount of any loss sustained by the corporation. And, assuming that the statutory action by a stockholder under the amendment might be maintained in a court of equity, the court held that the action was purely personal to the stockholder, and in no sense one on behalf of the corporation.

In a suit by a receiver of a corporation to recover from stockholders dividends illegally paid to them while the corporation was insolvent, it has been held proper to join as parties defendant creditors who have instituted actions individually against stockholders separately, or who threaten to bring such action, for the purpose of restraining the prosecution of such suits. Osgood v. Laytin (1867) 3 Keyes (N. Y.) 521.

Under the Georgia Code, shareholders who received dividends from the corporation before it was adjudicated a bankrupt, which were paid out of the capital assets of the corporation, may be joined as defendants in an action instituted by the trustee in bankruptcy to recover the amount of the dividends so paid. Carlisle v. Ottley (1915) 143 Ga. 797, L.R.A.1917C, 393, 85 S. E. 1010, Ann. Cas. 1917A, 573.

327 In Garetson Lumber Co. v. Hinson (1914) 69 Or. 605, 140 Pac. 633, it was held that the proper remedy

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that they were illegally declared and paid, it has been held that a suit in equity is the proper remedy.327 However, it has been held that the mere of the creditors of an insolvent corporation to reach funds alleged to have been paid to a stockholder as a dividend in liquidation is by a suit in equity, and not by an action at law.

It is held, also, in Williams v. Boice (1884) 38 N. J. Eq. 364, that the remedy to enforce, for the benefit of creditors of the corporation, restitution from stockholders of money paid to them out of capital of the corporation, as dividends on their stock, is in equity, and not at law.

A suit in equity may be maintained for the enforcement of the trust, the discovery of unknown sums, and the recovery by the trustee from the stockholders of both the known and unknown sums, and it is not a defense that the trustee had an adequate remedy at law, where suit is brought by the trustee against a stockholder to recover dividends paid to the latter at a time when the corporation was insolvent, to the knowledge of the stockholder, which insolvency was unknown to the creditors represented by the trustee, and it is alleged that other unknown sums had been misappropriated to the benefit of the stockholder in the same way. Ratcliff v. Clendenin (1916) 146 C. C. A. 253, 232 Fed. 61.

V.

It was also held in Hayden Thompson (1895) 17 C. C. A. 592, 36 U. S. App. 361, 71 Fed. 60, that, as there was no adequate remedy at law, the receiver of an insolvent national bank might maintain a suit in equity against all of the shareholders to recover dividends which had been unlawfully paid to them out of the capital of the bank at a time when it had earned no net profits and was insolvent. The decision is followed in Hayden v. Brown (1899; C. C.) 94 Fed. 15.

And it is held in Lawrence y, Greenup (1899) 38 C. C. A. 546, 97 Fed. 906, that a receiver of a national bank cannot, in an action at law, recover a dividend declared and paid by the bank in process of voluntary liquidation, when the bank at the time was solvent, the dividend did not reduce it to a state of insolvency, and it was paid and received in the honest belief that the assets justified such payment,

fact that dividends unlawfully declared constitute a trust fund for the payment of the debts of the corporation does not authorize a proceeding in equity to follow it into the hands of the stockholders, and a decree of payment over to a creditor, unless facts are alleged showing that the legal remedy will be unavailing, and the interposition of a court of equity necessary to enable him to obtain the payment of his demand;328 and so, a judgment creditor of the corporation cannot proceed in equity against a stockholder to recover so much of the dividends alleged to have been wrongfully paid to the latter as will satisfy the judgment, unless he alleges that the corporation is insolvent, or has been dissolved, that it has no property subject to execution, or other facts showing that the usual remedy by execution would be ineffectual.329

As regards the right to proceed in equity to enforce the liability of directors of a corporation for wrongfully declaring and paying dividends out of capital, the authorities are not altogether in accord. In a leading case on the question of the right of a receiver of a corporation to maintain a suit in equity for the purpose of holding directors liable for unlawful

although it was wholly paid out of discussed the capital. The court

question whether the remedy was at law or equity, and took the position that, even if the bank was insolvent at the time, the remedy was in equity.

Also in McLean v. Eastman (1880) 21 Hun (N. Y.) 312, it was held that no action at law could be maintained by the assignee in bankruptcy of an insolvent banking corporation, against a stockholder, to recover dividends received by the stockholder in good faith, but which were in fact declared at a time when the bank had earned no profits out of which a dividend could be made, and was in fact insolvent; the lien of creditors of an insolvent corporation upon its assets in the hands of others, independently of rights given by statute, being a purely equitable lien, and only enforceable in an equitable proceeding.

That, in the absence of fraud, an action at law will not lie by an individual creditor against an individ

127

declaration of dividends, the Maryland
court 330 held that equity has jurisdic-
tion of a bill by a receiver to hold
directors of a bank liable for losses
caused by their permitting illegal
loans and declaring improper divi-
dends. It was said that the authorities
are not uniform as to how far a court
of equity has jurisdiction in suits by
corporations or through receivers
against directors who are guilty of
negligence or of acts contrary to some
statutory provision; that it cannot be
denied that there may be charges of
mismanagement or negligence causing
loss or injury to the corporation for
which there could be no reason for
going into equity, the corporation hav-
ing a complete and adequate remedy
at law; that, however, not only could
a multiplicity of actions be prevented
by a proceeding in equity to redress
the wrongs complained of in this in-
stance, but that it would seem that
complete justice to all parties could
be thereby better assured than by ac-
tions at law; that it would be prac-
tically impossible for a jury properly
to dispose of all questions reached by
the bill, and that, when the fiduciary
relations which the directors occupied
to the corporation were remembered,
there would seem to be no reason why

ual stockholder to whom a part of the
capital stock has been paid in carry-
ing out a division of a large share of
the capital among stockholders, leav-
ing insufficient assets to pay debts, but
the remedy must be in equity, see also
Spear v. Grant (1819) 16 Mass. 9.

As to the rule in Wisconsin, see note 325, supra.

328 Dudley v. Price (1849) 10 B. Mon. (Ky.) 84.

329 Dudley V. Price (Ky.) supra. The court distinguished Gratz v. Redd (1843) 4 B. Mon. (Ky.) 178, in which the stockholder was held liable in equity to a judgment creditor of the corporation, on the ground that in that case the complainant, before the filing of the bill, obtained a judgment at law, upon which an execution had been returned unsatisfied.

330 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.

courts of equity should not have power to determine such controversies,especially in that state where the tendency was to extend, rather than to limit, the jurisdiction of such courts. Other cases also support the right to

331 It is held in Welles v. Graves (1890; C. C.) 41 Fed. 459, that the ascertainment of the various matters of fact involved in the question of the liability of directors of a national bank for unlawfully declaring dividends in violation of the Federal statute prohibiting dividends in a greater amount than net profits after deducting losses and bad debts, and the extent of their liability, requires the aid of a court of equity, and that an action at law by the receiver of the bank against the directors, based on violation of the statute, will not lie.

And it is held in Cochran v. Shetler (1926) 286 Pa. 226, 133 Atl. 232, that a receiver of an insolvent corporation may maintain a suit in equity to recover from directors the amount of the dividends which they unlawfully and negligently paid from the capital of the company, the objection being untenable in such a suit, where an accounting and discovery are necessary, that there is an adequate remedy at law.

Johnson v. Nevins (1914) 87 Misc. 430, 150 N. Y. Supp. 828, is also to the effect that proceedings to enforce the liability of directors for wrongfully paying dividends out of capital should be in equity. See this case in note 285, supra.

In a suit in equity brought by a receiver of a corporation against directors and others to recover fraudulently acquired assets of the company, it has been held that it is not a valid objection that the receiver could, by an action at law, have recovered salaries and dividends received by the defendants, since the transactions were all part of a general plan, and it would not be just to require either side to split up the cause of action into parts for trial in different courts, thereby involving duplication of labor and increasing the expense. Cahall v. Lofland (1920) 12 Del. Ch. 162, 108 Atl. 752.

As to the rule in Wisconsin, see note 325, supra.

332 It is said in Swartley v. Oak Leaf Creamery Co. (1907) 135 Iowa, 573,

proceed in equity to enforce the liability of directors for the wrongful declaration and payment of dividends.331 But there is authority apparently opposed to this view.332

It is shown elsewhere in the annota113 N. W. 496, that an action against the corporation, and the officers thereof, to enforce the statutory liability for declaring dividends when the company was insolvent, or when the payment of the same rendered it insolvent, was purely legal, and should be prosecuted on the law side of the court.

In a case where a part of the wrongful acts complained of was the unlawful declaration of dividends by directors of a bank, the court in Dykman v. Keeney (1897) 154 N. Y. 483, 48 N. E. 894, applied the doctrine that, where the action is to hold persons responsible to the receiver of a corporation for neglectful or wrongful performance of their duties as directors, and to recover the loss sustained by the corporation, the action is one at law, and something more is required to warrant the intervention of a court of equity than a mere allegation showing that the acts complained of are numerous and complicated, that they are difficult of ascertainment without a discovery with respect to them, and that a multiplicity of actions would be necessary if all the directors who were in office during a whole or a part of the time within which the act complained of was committed could not be associated as defendants in one action. It will be observed, however, that the principle involved is not distinctive to the present subject. The court said that in such actions as these the defendants, as directors, are not proceeded against strictly as trustees, but as agents acting for a principal, and that for any damage caused by their neglect and violation of duty the remedy at law is adequate.

It is intimated in Lexington & O. R. Co. v. Bridges (1847) 7 B. Mon. (Ky.) 556, 46 Am. Dec. 528, that creditors of a corporation would have a right of action at law, in an action on the case, against directors, to enforce their personal liability for wrongfully declaring dividends when there were no net profits to divide; but decision of the question was unnecessary, as the suit was in equity, and the observations of the court on this point arose in con

tion that the proper remedy to compel declaration of a dividend is in equity,332a

1. Survival and assignability of cause of action.

For the convenience of the practitioner, illustrative cases are here cited on the questions of survival and assignability of causes of action against directors or stockholders, where dividends are wrongfully paid from capital, though it should be noted, as also indicated below, that the principles extend beyond the scope of the annotation.

It has been held that a cause of action for declaring dividends out of capital, arising under the New York statute, making directors liable to the corporation and to its creditors for any loss sustained by them by reason of the withdrawal or division of capital, survives the death of a party defendant.333 But in a Federal case,334 construing the Maryland statute, it was held that the cause of action given by a statute declaring that, if the directors of a corporation declare and pay a dividend when the corporation is insolvent, or when the payment of the same would render it insolvent or diminish the amount of the capital stock, they shall be liable for all debts of the corporation then existing or contracted during their terms of office, is entirely of a personal character, and is not for a wrong nection with consideration of the running of the Statute of Limitations.

332a See note 369, infra.

333 Cox v. Leahy (1924) 209 App. Div. 313, 204 N. Y. Supp. 741.

334 Boston & M. R. Co. v. Graves (1897; C. C.) 80 Fed. 588 (construing Maryland statute as affected by laws of New York relating to survival of actions).

335 Killen v. Barnes (1900) 106 Wis. 546, 82 N. W. 536.

336 As to the penal nature of statutes of the kind indicated, see note 189, supra, and notes therein referred to.

336a See, for example, authorities relied on in Killen v. Barnes (Wis.) supra.

See also in this connection Merchants' Bank v. Bliss (1866) 35 N. Y. 412, in which the court, in dealing with 55 A.L.R.-9.

done to the property rights or interest of another, within the meaning of a statute relating to survival of actions for such wrongs to property rights or interests. And it has been held in Wisconsin 335 that the joint and several liability of the directors of a corporation for all of its indebtedness, under a statute of that state, resulting from a violation of its provisions respecting the payment of dividends, is penal in character; that a right to its benefits does not survive at common law nor under the statute of that state, and is not assignable. It may be observed, however, that the questions of whether or not statutes imposing liability on directors of a corporation for its debts, when dividends are unlawfully declared, are of a penal nature,3 336 and whether or not the right of action thereunder survives and is assignable, are not, on principle, limited to cases involving dividends, but extend to cases beyond the scope of the annotation, as those construing statutes making directors liable for debts because of failure to file reports or improper acts, such as illegal loans, etc.336a

g. Limitations of action.

For the convenience of the user of the annotation, conclusions reached in various cases as to statutes of limitation, in actions to enforce the liability of directors of corporations for wrongful declaration and payment of dividends,337 or to recover such dividends the question of limitation of actions, construed as of a penal nature a statute of that state declaring trustees of a corporation organized thereunder jointly and severally liable for all of its debts in case they violated its provisions respecting the declaration of dividends.

337 In Merchants' Bank V. Bliss (1866) 35 N. Y. 412, it was held that the statute of New York providing that, if trustees of corporations organized thereunder declared and paid a dividend the payment of which rendered it insolvent or diminished the amount of its capital stock, they should be jointly and severally liable for all the debts of the company then existing or thereafter contracted while they continued in office, imposed a penalty, or a liability of that nature,

to which the three-year Statute of Limitations for beginning an action by the aggrieved party upon a statute for a penalty was applicable

And in Patterson v. Wade (1902) 53 C. C. A. 1, 115 Fed. 770 (certiorari denied in (1903) 188 U. S. 741, 47 L. ed. 677, 23 Sup. Ct. Rep. 849), it was held that an action by a depositor of a bank against directors for violation of the provision of the Oregon statute, declaring that if directors of a corporation declare and pay dividends when the corporation is insolvent, or when the payment of the same would render it insolvent or diminish the amount of its capital stock, such directors should. be jointly and severally liable for the debts of the corporation then existing or incurred while they remained in office, was an action to recover a penalty and must be brought within the time limited by the laws of that state (three years) for the bringing of actions upon a statute for a penalty or forfeiture. To the same effect are Patterson v. Thompson (1898; C. C.) 86 Fed. 85; and Patterson v. Thompson (1898; C. C.) 90 Fed. 647.

And it was held in Patterson v. Wade (Fed.) supra, that a cause of action against directors for a violation of the statute accrues not when the illegal dividends are paid, but only upon the maturity of the creditor's debt, if it was not then due.

And that the cause of action accrues under such a statute, at least when the debt becomes due, see Patterson v. Thompson (1898; C. C.) 86 Fed. 85, supra; and Patterson v. Thompson (1898; C. C.) 90 Fed. 647, supra.

The personal liability of directors. to creditors of a corporation for wrongful declaration and payment of dividends through mistake as to the existence of profits is subject to the running of the Statute of Limitations, the trust on the part of the directors being, not a continuing one, but a limited one during their term of office, and therefore not such a trust as is withdrawn from the operation of the statute. Lexington & O. R. Co. v. Bridges (1847) 7 B. Mon. (Ky.) 556, 46 Am. Dec. 528. (See in this connection note 342, infra). The court took the view that there is a special reason for permitting a statute of limitations to have effect against enforcement in equity by a creditor of the corporation, of the personal liability of directors of a corporation for

wrongful declaration of dividends through mistake as to the existence of profits, in that if the directors were held liable they would be barred by limitation from enforcing the right to indemnity against the stockholders which they would otherwise have, and injustice would be done them if the Statute of Limitations would not operate as a bar in their favor when sued by creditors, but would operate against them when suit was brought by them to have the amount so paid refunded. See in this connection, as to right of directors to reimbursement, note 240, supra.

The position was taken also in Lexington & O. R. Co. v. Bridges (Ky.) supra, that the rule that a statute of limitations does not apply in cases of mistake until the mistake is discovered refers to a mistake of the complaining party, to redress which he cannot be said to have a cause of action until its existence is discovered, and does not operate to prevent the running of limitations against the personal liability of directors of a corporation for declaration of dividends through mistake on their part as to the existence of profits.

And it was held that, if a creditor of a corporation sought to avoid the effect of the Statute of Limitations against the enforcement by him of the personal liability of directors of a corporation for the wrongful declaration of dividends, on the ground that the statute should not begin to run until he discovered the mistake of the directors as to the existence of profits, he must show that, by the exercise of proper vigilance, he could not have made an earlier discovery of the facts. Ibid.

But in Stoltz v. Scott (1912) 23 Idaho, 104, 129 Pac. 340, it is held that, since the receiver represents the creditors, and not the corporation, in an action by him against the directors of a corporation to recover dividends paid in violation of a statute forbidding the declaration of dividends except from surplus profits, or the withdrawal or division of any part of the capital stock, and rendering assenting directors liable for capital stock so withdrawn, such an action is not barred as to the receiver even if it is conceded that as to the corporation it is barred by the Statute of Limitations, where the action was promptly brought after the creditors discov

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