de Raismes v. United States Lithograph Co.

McLaughlin, J.:

Action by a stockholder of the United States Lithograph '■ Company, a Hew Jersey corporation, on behalf of himself and other stockholders similarly situated, to recover in the name of the corporation damages for the payment of unauthorized dividends. All of the defendants except Sweasey and Ryan demurred to the complaint upon the ground that it did not state facts sufficient to constitute a cause of action, and that the court did not have jurisdiction of the subject-matter. Ryan demurred only upon the former ground. After the demurrers had been interposed the plaintiff moved, under section 547 of the Code of Civil Procedure, for judgment on the pleadings. The motion was granted and judgment awarded in favor of the corporation against the defendants — except Sweasey — for $300,000. The order awarding judgment against Ryan is not contained in the record on appeal, but by stipulation his appeal is to be heard upon the record before us with the same effect as though such order had been set forth therein.

The United States Lithograph Company was organized under the statutes of New Jersey on the 2d day of May, 1901, with an authorized capital of $3,200,000 preferred and $3,300,000 common stock, of which plaintiff is the owner of forty-nine shares of the preferred of the par value of $4,900. On April 27,1908, the corporation was duly authorized to do business in the State of New York, where it has since maintained offices, held directors’ meetings and performed all the, acts of which complaint is made.

The complaint alleges that certain dividends' were declared during the years 1909, 1910 and 1911 by the individual defendants acting as directors, and the same were paid out' of the capital stock of the corporation contrary to the laws and statutes of the State of New Jersey, and sections 28 and 70 of the Stock Corporation Law of the State of New York, and that by reason thereof the corporation has been damaged to the extent of $300,000, for which judgment is demanded in its favor against the defendants.

Section 30 of the General Corporation Law of New Jersey is set forth as it existed at the time of the incorporation of the lithograph company and as amended in 1904. This statute, as it existed at the time of the incorporation, provided: “ No corporation shall make dividends except from the surplus or net profits arising from its business * * * and in case of any violation of the provisions of this section the directors under whose administration the same may happen shall be jointly and severally liable * * * to the corporation * * (See N. J. Laws of 1896, chap. 185, § 30.)

As amended in 1904 it provides: “The directors of a corporation shall not make dividends except from its surplus or from the net profits arising from the business of such corporation. * * * in case of any wilful or negligent violation of the provisions of this section, the directors under whose administration the same may have happened * * * shall jointly and severally be liable * * * to the stockholders of such corporation, severally and respectively, to the full amount of any loss sustained by such stockholders, or in case of insolvency to the corporation or its receiver * * *.” (See N. J. Laws of 1904, chap. 143; 2 N. J. Comp. Stat. 1617, § 30.)

Section 28 of the New York Stock Corporation Law as it existed at the time the dividends were made and this action commenced, provided: “The directors of a stock corporation shall not make dividends except from the surplus profits arising from the business of such corporation * * *. In case of any violation of the provisions of this section the directors under whose administration the same may have happened * * * shall jointly and severally be liable to such corporation and to the creditors thereof * *

Section 70 provided: “Except as otherwise provided in this chapter the officers, directors and stockholders of a foreign stock corporation transacting business in this State, except moneyed and railroad corporations, shall be liable under the provisions of this chapter, in the same manner and to the same extent as the officers, directors and stockholders of a domestic corporation, for: 1. The making of unauthorized dividends * * *. Such liabilities may be enforced in the courts of this State, in the same manner as similar liabilities imposed by law upon the officers, directors and stockholders of domestic corporations.” (See Consol. Laws, chap. 59 [Laws of 1909, chap. 61], §§ 28, 70.)

In Hutchinson v. Stadler (85 App. Div. 424) action was brought by a stockholder of a New Jersey corporation on behalf of himself and other stockholders similarly situated to recover, as here, a judgment for the corporation against directors who had paid dividends out of capital stock. The statute of New Jersey then in force was the one which existed at the time the lithograph company was incorporated, and upon reference to its provisions above quoted it will be seen that it expressly provided such an action might be maintained’ for the benefit of the corporation. The statutes of the State of New York then in force were sections 23 and 60 of the former Stock Corporation Law (Gen. Laws, chap. 36 [Laws of 1892, chap. 688], § 23; since amd. by Laws of 1901, chap. 354; Id. § 60, added by Laws of 1897, chap. 384), which were substantially the same as sections 28 and 70 of the present Stock Corporation Law. The court held, considering the provisions of the statutes of the two States, that the action could be maintained. A majority of the court,' however, was of the opinion that in the absence of a statutory provision, the directors of a corporation were not liable to the corporation for a distribution as dividend to the stockholders of the capital of the corporation so long as the payment of such dividend did not impair the power of the corporation to pay its indebtedness. This was upon the ground that the capital of a corporation belongs to its stockholders after its indebtedness is paid. Mr. Justice Ingraham, who delivered the prevailing opinion, said: “In the absence of a statutory prohibition, distribution of a portion of the capital of the corporation to the stockholders according to their respective interests, where each stockholder received his proportionate share of the total amount distributed, would not give to the corporation a cause of action to compel the director to repay into the treasury of the corporation the amount of money thus distributed.” That decision was made in 1903, and in 1904 the New Jersey statute was amended as above • set forth. The amended statute made the directors making unauthorized dividends liable, not to the corporation, but to the stockholders severally and respectively to the full amount of any loss sustained by such stockholders, or, in case of insolvency, to the corporation or its receiver; in other words, after the amendment of the New Jersey statute in 1904 an action in the form in which this one is brought could not be ; maintained in that State. This action could not be maintained in the State of New Jersey and this was practically- conceded by respondent’s counsel upon the argument of the appeal.

The question presented, therefore, is whether in view of our own statutes bearing upon the subject of unauthorized dividends a stockholder of a foreign corporation can maintain an action in the State of New York to recover a judgment in the name of the corporation for the amount of the dividends so declared when such action could not be maintained in the State where the corporation had its origin.

There is no allegation in the complaint that the plaintiff has individually been damaged and there could not well be because he does not sue in the right of any individual claim, but solely in the alleged right of the corporation itself, which right was taken from the stockholders by the amendment of 1904, nor is there any allegation that the corporation is insolvent. The learned justice sitting at Special Term was of the opinion that the action could be maintained because plaintiff was merely seeking to enforce a right created by the statutes of New Jersey by means of a remedy to enforce the same by the State of New York. This view, it seems to me, is erroneous. The right here sought to be enforced is one created, not by the statute of the State of New Jersey, but by the statute of the State of New York. The right given by the statute of New Jersey is for the benefit of the individual stockholders and the one given by the State of New York for the benefit of the corporation — different causes of action, requiring different evidence to establish, and for which different relief must be given. Reading section 28 of the Stock Corporation Law of this State in connection with section 70 thereof, it seems to me the only right intended to be given, or liability to be imposed upon the directors of a foreign stock corporation, other than a moneyed or railroad corporation, for making unauthorized dividends is the same liability or obligation as that imposed by the statute of the State from which the corporation received its charter. Force is given to this view when these two sections are read in connection with section 84 relating to the filing of reports, and sections 14 and 15 relating to combinations and mergers.

The State of New York has for many years recognized that the internal management- of a foreign corporation should be left entirely to the State of its origin. (Marshall v. Sherman, 148 N. Y. 9; Knickerbocker Trust Co. v. Iselin, 185 id. 54; Southworth v. Morgan, 205 id. 293.) What the Legislature df the State of ¡New York has attempted to do in the sections of the statute to which reference has heretofore been made is to give a remedy by which a liability imposed by the statutes of another State, either upon stockholders or directors or officers, may be enforced in the State of ¡New York in precisely the same way and to the same extent, and no other, that it could in the State where such foreign corporation obtained its charter.

The complaint, in my opinion, does not state a cause of action, and for that reason the order appealed from should be reversed, with ten dollars costs and disbursements, and the motion denied, with ten dollars costs, with leave to the plaintiff to amend within twenty days on payment of said costs.

Clarke and Hotchkiss, JJ., concurred; Ingraham, P. J., and Scott, J., dissented.