38 N.J. Eq. 364 | New York Court of Chancery | 1884
The bill is filed by the receiver of the City Bank of Jersey City against a number of persons to recover dividends paid to them or those whose personal representatives they are, on and after January 3d, 1876, out of the assets of the bank, on its stock held by them. The bank was incorporated under the act of the legislature of this state entitled “An act to authorize the business of' banking.” The amount of its capital stock was $100,000, all of which was subscribed for, but only fifty per cent, of it was called for or paid in. It began business January 2d, 1872, and continued it down to January 9th, 1883, when it stopped payment and suspended business. The next day it was, on proceedings in insolvency in this court, under the act concerning corporations, adjudged insolvent, and the complainant was appointed receiver. The bill states that the assets are insufficient, to pay the debts, and that the deficiency is about $175,000. It also states that the corporation declared and paid sundry dividends on the fifty per cent, of capital paid in, which at the time were alleged by the bank officers to be declared and paid out of its earnings, but it alleges that those dividends, on and after the 3d of January, 1876, were declared and paid at times when, by reason of losses and expenses in business and diminution of'
The principal grounds taken by the counsel of the demurrants are that the bill cannot be maintained, because the defendants are not liable to the suit, inasmuch as the legislature has provided that the directors shall be liable to repay dividends not declared out of the profits of a corporation ; that the bill is multifarious ; that the remedy, if it exists against the defendants, is at law and
It is undeniably true, as a general proposition, that stockholders are liable in equity to repay, for the benefit of the creditors of the corporation, money which has been paid to them out of the capital stock. This is not based on any statute, but upon the equitable ground that the stock is regarded as a trust fund for all the debts of the corporation, and no stockholder can entitle.himself to any dividend or share of it until all the debts are paid. Story Eq. Jur. § 1252. And the remedy is in equity and’ not at law. The truth of the proposition as a general one is not denied, but it is insisted that by force of our statute concerning corporations the liability has im this state been transferred from the •stockholders who may be, and most often are, ignorant of the true condition of the corporation when the dividend is paid, to the directors who do know it, and who are the persons really in
Nor is the criticism that the bill does' not state that there were no profits out of which to pay the dividends, well founded. The bill states that there was a deficiency of other assets besides the money divided, to pay the debts. It states that when the dividends were declared the assets were, by reason of losses and expenses in business and diminution by improper and unauthorized acts of the officers, insufficient to pay the liabilities of the bank to depositors and other creditors without impairing the $50,000 of capital paid in, so that there were no profits at such times out of which to pay those dividends, and so far as they were paid they were paid out of the capital paid in.
Another objection is that there is no allegation that any of the debts which now exist were debts or liabilities at the time of the payment of the dividends. The bill makes no such statement, nor is the fact fairly to be deduced from its statements. Although there are eases in which it has been said that recovery can only be had in cases of this kind by creditors whose debts existed at the time of the withdrawal of the funds, that view is not to be adopted. The distinction is not well founded. The capital of a corporation is a fund pledged for the payment of its debts. Each person who gives credit to it does so in the confidence that that fund exists for his protection and security against loss. If the stockholders secretly withdraw it, under the false pretence of dividends of profits when there are none, it is obvious that as great a wrong may be done to future creditors as to existing ones. In either case the stockholders hold a part of that fund, which is pledged to the payment of the creditors. The injury to the existing creditor is .obvious. That to the future creditor is the same; for the stockholder holds out to him that the capital is of the nominal amount, while in fact he has secretly withdrawn part of it. If all who should become creditors after the withdrawal had notice of the fact that the capital
The objection that the bill does not state that there were not enough assets to pay the debts when the dividends were made is founded on a misapprehension as to the statements of the bill, for the allegation is distinctly made.
ISTor is the objection that it does not appear that there are not enough assets now to pay the debts which have been proven, tenable. It does not appear what debts have been proven, and it cannot appear until after this court shall have made a decree of distribution what debts will be allowed. For the purposes <of this suit, it is not necessary to make any allegation on that head. After applying the assets aud capital not paid in to the payment of the debts, there will, as before stated, remain a deficiency of about $125,000. The whole of the dividends declared on and after January 3d, 1876, amounts to about $15,000.
If or is the objection of multifariousness well taken. The stockholders who are called upon to make contribution are necessary parties, and should all be made parties unless good reason exists to the contrary. In Wood v. Dummer, 3 Mason 308, which was a suit by creditors of a bank against some of the stockholders for payment of debts, on the ground of a fraudulent division of the capital stock of the bank by the stockholders, the objection of non-joinder was made, and it was insisted that all the stockholders ought to be made parties defendant, because all were liable to contribute. The objection was overruled on the .ground that it would be impracticable to bring in all the stockholders. In Vose v. Grant, 15 Mass. 505, and Spear v. Grant, 16 Mass. 9, the stockholders of an incorporated bank, after the expiration of its charter, had made dividends of the capital stock among themselves, so that there were not enough corporate funds left to pay its debts, and a creditor brought suit as for a tort against one of them who had received his proportion of the dividends. It was held that he could not maintain the .suit at law, but that a court of chancery, where suit could be
It remains to consider another question not raised on the argument, viz., whether limitation from lapse of time, in analogy to the bar of the statute of limitations, can avail the defendants, t/I am of opinion that it cannot. When it is considered that the-withdrawal of part of the capital, under pretence of a division of profits where there are no profits to divide, is a fraud on the creditors, it will be seen at once that a plea of such limitation could not, except under peculiar circumstances, be successfully interposed to bar the claim of creditors for relief against the doers of or participants in the fraud. The case is very like that of a trustee secretly applying the trust property to his own use. He cannot thus protect himself against the claim of his cestui' que trust. In Wood v. Dummer, ubi supra, this question was considered by Judge Story, who sai-d that the rights of the plaintiffs in that case accrued as against the defendants within six years; for until a refusal of payment by the bank, followed by an inability to pay on its part, there was no cause of proceeding in equity against the stockholders; that in cases not of constructive, but of express trusts, so long as they are not’ encountered by an adverse possession and denial of right, the statute of limitations does not begin to run. He added that he should have very great difficulty in allowing a bar of the statute of limitations to operate in a case of this nature, unless where the circumstances of negligence on the one side and of positive denial of right on the other were very cogent. In the case before me the bill was filed June 20th, 1883. The complainant seeks to recover dividends declared on and after January 3d, 1876. The bank stopped payment January 9th, 1883, and the receiver was appointed the next day. The defendants could not avail themselves of the plea of limitation from lapse of time. The demurrers will be overruled, with costs.