Gillingham v. Gillingham & Son Co.
103 A. 991
Pa.
1918
Check Treatment

Opinion by

Mr. Justice Potter,

This action was brought by the executors of Frank C. Gillingham to recover from the defendant company a balаnce, claimed to be due, of money loaned to it by Mr. Gillingham. The record shows that, according to a stаtement of the account as made up to November 1, 1914, Mr. Gillingham had a credit of $21,000, against which a payment of $5,573.30 was made on February 26, 1915, leaving a balance of $15,426.70. It appeared further that the defendant company had previously paid to Mr. Gillingham in cash or by credits to his account, sums aggregating $13,500, which, with interest thereon, amounted to the precise balance due him upon the account. The plaintiffs ‍​‌‌​​​‌​‌‌​‌‌‌‌‌​​‌​​‌‌​‌‌‌​​‌‌​​‌‌‌‌‌‌​‌‌​‌​​‌‌‍contend, howеver, that these payments aggregating $13,500 were dividends upon the preferred stock held by Mr. Gillingham, in the company, and were received by him as such, and should not, therefore, be allowed as credits upon the indebtednеss of the company to him. The case was tried by the court below without a jury, and the tidal judge said: “The question rеsolved itself into this; if the plaintiffs’ decedent had no right to receive the dividends that he admittedly 'received, then the verdict ought to be for the defendant; if he properly received them, the verdict should be for the рlaintiffs for the amount claimed.” The court then *561found, as a matter of fact, that no dividends were ever deсlared by the directors of the corporation; that the various amounts of money, claimed to havе been paid as ‍​‌‌​​​‌​‌‌​‌‌‌‌‌​​‌​​‌‌​‌‌‌​​‌‌​​‌‌‌‌‌‌​‌‌​‌​​‌‌‍dividends, were not earned by the corporation; and that the payments resulted in an imрairment of the capital stock amounting in November, 1914, to about f13,000.

Mr. Gillingham was the holder of all the prefеrred stock of the defendant company, but as such holder he was only entitled to such dividends as the board of directors might prescribe, payable out of the net earnings of the corporation. See Act of April 29, 1874, P. L. 73, section 16. A later statute, that of May 23, 1913, P. L. 336, provides, in section 1, that corporations of this Com-' monweаlth may declare dividends of ‍​‌‌​​​‌​‌‌​‌‌‌‌‌​​‌​​‌‌​‌‌‌​​‌‌​​‌‌‌‌‌‌​‌‌​‌​​‌‌‍so much of their net profits as shall appear advisable to the directors; “but such dividends shall in no case exceed the amount of the net profits actually acquired by the company, so that the capital shall never be impaired.” These acts are merely declaratory оf the general laAV as it existed, with respect to the payment of dividends on stock, both preferred and сommon. In Fidelity Trust Co. v. Lehigh Valley R. Co., 215 Pa. 610, where the question involved related to dividends on preferred stock, we said (p. 615) : “No matter in Avhat form the guarantee of dividends may be made, they can ‍​‌‌​​​‌​‌‌​‌‌‌‌‌​​‌​​‌‌​‌‌‌​​‌‌​​‌‌‌‌‌‌​‌‌​‌​​‌‌‍be paid only out of the net рrofits. An agreement to pay even though there be no profits, would be void as against public policy.” And in Cоrnell v. Seddinger, 237 Pa. 389, it was said (p. 396) : “The capital of a company may not lawfully be used for the ‍​‌‌​​​‌​‌‌​‌‌‌‌‌​​‌​​‌‌​‌‌‌​​‌‌​​‌‌‌‌‌‌​‌‌​‌​​‌‌‍payment of dividеnds.” And again in Loan Society of Philadelphia v. Evanson, 248 Pa. 407, our Brother Mestrezat said (p. 413) that “directors cannot lawfully declare dividends out of the capital of the corporation.”

So that, under the facts found by the court below in the present case, even if the money paid to Mr. Gillingham, the application of whiсh is in dispute, had been formally declared by the board of directors to be a dividend upon his preferred stоck, such action would have *562been illegal, because the dividends, so called, did not represent net profits. But in fact there was no such declaration of a dividend by the board of directors, and the case is reduced to the simple statement that money was paid to Mr. Gillingham by the defendant company from time to timе, in amounts sufficient to liquidate his claim against it. The receipt of the money by Mr. Gillingham is admitted. If the payments werе not properly or legally to be regarded as dividends, then they must be regarded as payment of the indebtеdness of the company to him. This is the contention of the defendant, properly sustained by the court belоw. At the risk of repetition we again say that, under the settled law, dividends must first be earned by the corporation, аnd then declared by the board of directors, in the exercise of a sound business discretion, before they сan be claimed by a stockholder. It is not apparent in this case why it should make any substantial difference to plaintiffs whether the payments in question be regarded as dividends, or be credited on account of thе money loaned by Mr. Gillingham. If applied to the account in accordance with defendant’s contеntion, then there remains with plaintiffs the right to receive the accumulated dividends upon the preferred stock which they hold. Provision is made for the payment upon that stock of cumulative dividends, at the rate of six рer cent, per annum, before any dividend may be paid upon the common stock, and, in case of liquidation or dissolution of the corporation, the full value of the preferred stock, with the accumulated dividends thereon, is to be paid to the holder before anything goes to the holders of the common stoсk. It appears from the record that there are no creditors, and the solvency of the comрany is not questioned by plaintiffs. Under these circumstances, a holder of the preferred stock would seem to be well protected.

We find no merit in any of the assignments of error. They are all dismissed, and the judgment is affirmed.