Davenport, Receiver v. Lines , 72 Conn. 118 ( 1899 )

In the trial court the defendant objected to any and all evidence tending to prove certain facts found, as set out in paragraph 45 of the finding. This objection is without merit. The plaintiff was entitled to prove the facts objected to, by any legitimate evidence, as bearing upon the question of the insolvency of the corporation, and upon the question whether its capital was impaired when the money in question was paid. Upon both of these questions all the facts objected to were relevant and admissible.

One of the important questions in the case is whether, upon the facts found, the corporation was insolvent and its capital stock impaired when the money in question was paid; and its solution depends upon the further question whether certain items included among the assets of the corporation in its inventories of July 1st, 1894 and 1895, were rightfully so included at all, or were rightfully so included at the amount stated in the inventory.

The inventory of July 1st, 1894, showed a surplus of $1,610.56. This result was reached by including among the assets three items, one of which the plaintiff claims is largely overvalued, and two of which he claims should not be included at all.

The first is the pattern and scales account, inventoried at $15,155. This was the value placed upon the patterns and scales when bought by the corporation at its organization, as stated in the finding, in October, 1892. This valuation as then made included the "business" or good will of the copartnership from which the patterns and scales were bought. Assuming for the purposes of the argument that the "good will" of the copartnership might be purchased and included as part of the assets of the corporation when it was organized, and that the good will and the patterns and scales together were at that time worth the price paid for them, it does not follow that that valuation continued the same down to July 1st, 1894. The court finds that in July, 1894, the patterns and scales themselves were not worth one half of the sum at which they were then inventoried; and it cannot find and fails to find what the "good will" was worth, as no evidence appears to have been offered upon that subject. This, we think, for the purposes of this case, must be regarded as a finding that this item was overvalued in the inventory to the extent of at least one half of the amount there stated.

One of the other items charged as an asset was the sum of $2,229.24, which represented money expended in an exhibit at the World's Fair in Chicago in 1893 for advertising purposes. "Said sum represented no tangible asset." This expenditure may or may not have increased the business of the corporation, but the court has failed to find that as an asset it had any value, and this is equivalent to a finding that it had none at that time, and ought not to have been included among the assets.

In this view of the case the corporation, in July, 1894, was insolvent and its capital stock impaired, without reference to the other item to which the plaintiff objects, and which therefore need not be specially considered. Suffice it to say, that upon the facts found we think this last item, expenses on material on hand, amounting to $8,992.44, ought not to be included among the assets. The inventory of July 1st, 1895, was made up in substantially the same way as to these three items as that of 1894, and showed substantially the same condition of things as to insolvency and impairment of capital stock.

Upon the facts set forth in the record, then, the trial court has, in effect, found that the corporation, when the money here in question was paid to the defendant, was in fact insolvent and its capital stock impaired, and has expressly found that it so continued until the receiver was appointed.

The remaining question is whether the money paid to the defendant under the circumstances set forth in the record can be recovered back in this action. We think it can be. The defendant claims that he received this money in the shape of dividends which had been, in effect, regularly declared by the board of directors at a regular and lawful meeting. The record does not perhaps support this claim, but for the purposes of the discussion we will assume it to be true.

The general rule, even in the absence of any statute on the subject, is that dividends, in a going concern, can be properly declared and paid only out of profits, and not out of capital, or assets required for the security and payment of creditors. Morawetz on Private Corporations (1st ed.), § 344; Redfield on Railways, § 240; 2 Thompson on Corporations, § 2152. This rule applies whether the stock upon which the dividend is declared is common stock or, as in this case, preferred stock. Warren v. King, 108 U.S. 389; Cotting v. New York N.E. R. Co., 56 Conn. 156-169.

In addition to this our statute expressly says that "no corporation shall declare any dividend while its capital stock is impaired," and makes the officers voting in favor of such dividend, "knowing or having the means of knowing that such capital is impaired," liable for all losses resulting from such declaration, and their action in so voting is made a misdemeanor. General Statutes, § 1932.

The dividends here in question were declared and paid when the corporation was insolvent and its capital stock impaired, and were thus declared and paid in direct violation of these legal principles and of this statutory enactment. The money paid to the defendant in the form of dividends was wrongfully paid to the prejudice of the creditors of the corporation, to one who was not only a stockholder of the corporation but was also a director therein from its organization until it went into the hands of the receiver. Its condition when the dividends in question were declared and paid was clearly shown upon its books, inventories and quarterly statements; and it is expressly found that the attention of the defendant was specifically called to its financial condition as it appeared upon its books, at the very time these dividends were declared and paid. It thus appears that the defendant, when he participated in the declaration and payment of these dividends, and when he accepted them in payment, knew or had the means of knowing that the money really and in fact belonged to the creditors of the corporation, because it was required for the payment of their claims, and could not legally be paid away under the form of a dividend, to one standing in his position. Under these circumstances the money paid to the defendant was part of a trust fund which belonged to the creditors of the corporation, to which he could acquire no title as against them, because he took it without consideration and with full knowledge of the trust which existed in their favor. The plaintiff in this case, as the representative of the creditors of the corporation, is entitled to sue for and recover back the money so paid. Crandall v. Lincoln,52 Conn. 73; Greene v. Sprague Mfg. Co., ibid. 330.

The court of Common Pleas is advised to render judgment for the plaintiff to recover the dividends paid to the defendant, with interest from the respective dates of payment.

In this opinion the other judges concurred.