Bartlett v. Smith

160 A. 440, 162 Md. 478, 1932 Md. LEXIS 140

• Court: Court of Appeals of Maryland
• Decided: April 28, 1932
• Docket: [No. 61, January Term, 1932.]
• Status: Published

Opinions

Adkins, J.,

delivered the opinion of the Court.

This appeal is from the judgment for costs in favor of the defendants on the demurrer to the amended declaration.

The plaintiffs are the ancillary receivers of the First National Company, a corporation incorporated under the laws of the State of Delaware, and the defendants are the executors of a deceased stockholder of said company.

The suit is in assumpsit, for dividends adeged to have been illegally paid to the defendants’ decedent. The first count of the declaration alleges that on or about the 1st day of October, 1927, the said company illegally paid to the defendants’ decedent, a stockholder of said corporation, as an alleged dividend, the sum of $35.35; that the said alleged dividend was not paid out of earnings of the corporation but out of the capital of said corporation to the impairment thereof; that the payment of the said alleged dividend was unlawful and in violation of the statutes of the State of Delaware; that certain of the creditors of said corporation in existence at the time of the appointment of receivers were-creditors thereof when the said alleged dividend was paid and still are creditors, and that the creditors of said corporation were damaged by such payment; that the said company has assets far insufficient to pay the claims of its general creditors, the amount of the deficiency exceeding the amount of all dividends legally paid by the company to all its stockholders; that the plaintiffs are duly acting as ancillary receivers for said corporation and have been duly authorized by an order of court to institute this suit; that demand has been duly made upon the defendants for repayment of said sums so illegally paid, bnt that the defendants have unlawfully neglected and refused to pay the same.

Five other counts allege the payment to defendants’ decedent of like amounts on January 1st, 1928, April 1st, 1928, July 1st, 1928, October 1st, 1928, and January 1st, 1929, respectively, and contain the same allegations as set out in the first count, except that in each of said five counts it is alleged that at the time of the payment of the alleged dividend the corporation was insolvent and its assets were less than its liabilities.

The grounds of the demurrer are:

(1) That the declaration does not state a good cause of action against the defendants.

(2) That it is bad in substance and insufficient in law.

(3) That the defendants cannot tell whether it is the purpose of the declaration to state a cause of action in contract or in tort.

(4) That under sections 34 and 35 of the Delaware Corporation Law (Rev. Code, 1915, secs. 1948, 1949, as amended by Acts Gen. Assem. March 2nd, 1927 [35 Del. Laws, ch. 85, secs. 16, 17]) the receivers are given a statutory right of action against the directors of the company to recover dividends illegally declared and paid, and that such right of action, if pursued against the directors would result in the recovery from said directors of such dividends in full, thus exonerating the stockholders; that the declaration does not allege that any effort has been made to enforce any statutory remedy against the officers and directors of the company; that the moneys sought to be recovered in this action are not recoverable from the stockholders who received them innocently, believing the dividends to have been declared and paid out of profits, unless and until the statutory remedy against the officers and directors who are guilty of the wrong, has been exhausted.

(5) That by the provisions of section 49 of the Delaware Corporation Law (Rev. Code Del. 1915, sec. 1963) it is required that any liability against the officers, directors or stockholders of any Delaware corporation under the provisions of such law shall be enforced by an action on the case, or by bill in chancery; that, if the declaration be construed to be an action in tort, there is an improper joinder of claims; that the declaration fails to allege any complicity in the wrongs on the part of the defendants.

(6) That the first count does not allege that the corporation was insolvent at the time when the dividend therein referred to was paid.

We do not find any substance in the third ground. The declaration clearly sets out an action in assumpsit for money had and received.

The important questions are: Can an innocent stockholder be required to refund dividends, seemingly declared in regular course of business out of profits, but actually declared and paid out of capital (1) when the corporation was not insolvent at the time the dividends were paid, but subsequently became insolvent? (2) .when the corporation was insolvent at the time the dividends were paid ?

The first question has been answered in the negative by the Supreme Court of the United States (McDonald, Receiver, v. Williams, 174 U. S. 397, 19 S. Ct. 743, 43 L. Ed. 1022) and by the federal courts generally. See Wood v. National City Bank (C. C. A.), 24 Fed. (2nd) 661. These courts have repudiated the trust fund doctrine as applied to capital stock.

There is substantial authority on the other side in jurisdictions other than federal. As illustrations, see Williams v. Boice, 38 N. J. Eq. 364; Mills v. Hendershot, 70 N. J. Eq. 258, 265, 62 A. 542 (cited with approval in Day v. U. S., 96 N. J. Eq. 736, 740, 126 A. 302); Cottrell v. Albany Card & Paper Co., 142 App. Div. 148, 126 N. Y. S. 1070 (cited with approval in Small v. Sullivan, 245 N. Y. 343, 350, 157 N. E. 261); Mackall v. Pocock, 136 Minn. 8, 161 N. W. 228; Minnesota Thresher Mfg. Co. v. Langdon, 44 Minn. 37, 46 N. W. 310; Detroit Trust Co. v. Goodrich, 175 Mich. 168, 141 N. W. 882; 2 Cook on Corporations (8th Ed.), sec. 548. Some of these decisions are under statutes; and some are in jurisdictions which do not accept the trust fund doctrine; and in one or more of them the stockholders were not innocent. Such cases are cited not for their conclusion, bnt for the argument. So far as we are advised this is a pioneer case in this state as to the specific questions involved.

The first question concerns the first count of the declaration, and the second the remaining five counts. On the former argument we held that the demurrer should have been overruled as to all the counts.

As to the first question we were then of the opinion that in Crawford v. Rohrer, 59 Md. 604, and Maryland Trust Co. v. National Mechanics’ Bank, 102 Md. 608, 63 A. 70, this court had definitely recognized the trust fund doctrine as applicable to capital stock. Our attention was not then called to Fear v. Bartlett, Trustee, 81 Md. 435, 32 A. 322, in which it was said that the trust fund doctrine has no application to solvent corporations. The question now under consideration was not directly involved in any of those cases, and the corporation laws of the state have since been revised, and many restrictions removed. We are satisfied on reargument that there are no binding precedents.

In this situation we are disposed to follow the federal decisions as being more in accord with modern conditions and with the realities of life. In these days stocks of corporations are so widely held that it would be practically impossible for stockholders generally to know whether or not each semi-annual dividend paid in regular course was earned. Whatever their position may be theoretically, practically they are in no better position than creditors to know the condition of the company, and it would be an unfair and unreasonable burden to require them to pay back, years after they have been spent, dividends received in good faith from a solvent corporation in regular course of business.

We hold that on the first, second, and sixth grounds assigned the first count of the declaration is bad.

As to the second question, which concerns all the counts except the first, there is but little conflict in the authorities. It is generally held that dividends paid when the corporation was insolvent may be recovered for the benefit of creditors. As illustrations: Powers v. Heggie, 268 Mass. 233, 167 N. E. 314; Williams v. Boice, supra; Detroit Trust Co. v. Goodrich, supra; Fricke v. Angemeier, 53 Ind. App. 140, 101 N. E. 329; Minnesota Thresher Mfg. Co. v. Langdon, supra; Mackall v. Pocock, supra; Wood v. National City Bank (C. C. A.), 24 Fed. (2nd) 661; 2 Cook on Corporations (8th Ed.), sec. 548; 6 Fletcher, Cyclopedia Corporations, secs. 33, 37.

A sufficient and satisfactory ground is that money so paid after insolvency was taken from a fund held in trust for creditors and did not belong to the corporation; and it could give no title in the money it paid to one wlio did not receive it tona fide and for value. Fear v. Bartlett, 81 Md. 435, 32 A. 322; Fogg v. Blair, 133 U. S. 534, 541, 10 S. Ct. 338, 33 L. Ed. 721; McDonald v. Williams, 174 U. S. 397, 404, 19 S. Ct. 743, 43 L. Ed. 1022.

The fourth ground of demurrer is well answered in Powers v. Heggie, supra: “If it is assumed * * * that judicial notice is taken of the laws of Delaware; the statutory liability of the directors does not exonerate the defendant who has received dividends from liability to repay them for the benefit of the creditors. The ‘statute does not transfer the liability from the stockholders to' the directors, but it creates a liability on the part of the latter in favor of the corporation or the creditors in certain events. * * * But that provision does not, either in terms or by implication, exonerate the stockholders. * * * The remedy given by the statute is cumulative. The Legislature does not say that the stockholders shall be at liberty to keep- the money, and that the creditors must have recourse to the directors alone,’ ” citing numerous authorities.

It is needless to add that courts in Maryland do not take judicial notice of the statutes of other states. 2 Poe, Pl. & Pr., sec. 272; Mandru v. Ashby, 108 Md. 695, 71 A. 312; Goldsborough v. Tinsley, 138 Md. 411, 113 A. 861.

What we have said in reference to the fourth ground applies also to the fifth. It may be added that the remedy granted by section 49 of the Delaware statute, as quoted in appellees’ brief, has no' reference to claims for dividends illegally paid, so far as stockholders are concerned, as no stockholders’ liability is provided by the statute. We do not mean to hold that, if the Delaware statute were as contended by appellees, and were in evidence, the law of the forum would not prevail in this case. Mandru v. Ashby, supra; Powers v. Heggie, supra. It is not necessary here to decide that question.

On the question of jurisdiction in oases of this sort, apart from statutory provisions, there is much diversity of authority. In 2 Cook on Corporations (8th Ed.), sec. 349, it is said the more general practice is to proceed by bill in equity. In 6 Fletcher, Cyclopedia, Corporations; sec. 3739, it is said that equity has jurisdiction in such cases, “and, as a rule such dividends may also be recovered in an action at law,” citing a number of cases, “although there are holdings to the effect that the remedy in equity is exclusive, and that an action at law will not lie,” citing two early Massachusetts cases, a New Jersey, an Alabama, and an Oregon case; also Lawrence v. Greenup (C. C. A.) 97 Fed. 906.

In 1 Poe, Pl. & Pr., sec. 117, it is said that the count for money had and received “is commonly said to be equally remedial with a bill in equity, and, in general terms, lies whenever the defendant has obtained possession of money which, in equity and good conscience, he ought not to be allowed to retain * * * and the gist of the action is, that upon the circumstances of the case, the defendant ought by the ties of natural justice and equity to refund the money”— citing Murphey v. Barron, 1 H. & G. 258; Boyce v. Wilson, 32 Md. 122; National Mechanics' Bank v. National Bank of Baltimore, 36 Md. 5 ; Blair v. Blair, 39 Md. 556; Mills v. Bailey, 88 Md. 321, 41 A. 780; Vrooman v. McKaig, 4 Md. 450; O’Neal v. Board of School Commissioners, 27 Md. 227.

In view of the nature of this action and the decisions in this state as to its wide applicability, we see no reason why it is not available in this case. We think there is concurrent jurisdiction.

It is strongly urged by appellees that the large number of claims for dividends improperly paid should be adjusted in the receivership case, where questions of contribution and other equities could be adjusted, and multiplicity of suits avoided. It may be that a court of equity would have been a more appropriate and convenient tribunal, but it does not follow that a court of law is without jurisdiction. The allegation in each of the counts of the declaration that “the said company has assets far insufficient to pay the claims, of its general creditors, the amount of the deficiency exceeding the amount of all dividends illegally paid by the company to all its stockholders,” would seem to eliminate the question of contribution. But if that question should arise', the defendant would have his remedy against the other stockholders. A plaintiff may proceed in equity to> avoid multiplicity of suits where equity would otherwise not have jurisdiction, but he is not obliged to.

Our conclusion is that all the counts in the declaration except the first are good. As the demurrer was a general demurrer, it should have been overruled.

This opinion and order will be substituted for those filed on December 29th, 1931.

Judgment reversed, and case remanded, with costs.