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Ottinger v. Bennett

Supreme Court of New York, Appellate Division

May 19, 1911

MARX OTTINGER and MOSES OTTINGER, Respondents,
v.
JOHN R. BENNETT, Appellant, Impleaded with OREN DENNETT and Others, Defendants.

Page 526

APPEAL by the defendant, John R. Bennett, from an interlocutory judgment of the Supreme Court in favor of the plaintiffs, entered in the office of the clerk of the county of New York on the 22d day of November, 1910, upon the decision of the court, rendered after a trial at the New York Special Term, sustaining the plaintiffs' demurrer to a partial defense contained in the amended answer of the defendant, John R. Bennett.

COUNSEL

Thomas D. Adams, for the appellant.

Nathan Ottinger, for the respondents.

INGRAHAM, P. J.:

Upon an appeal from a judgment sustaining a demurrer to a separate defense set up in the answer the defendant attacks the sufficiency of the complaint, and as I do not think the complaint alleges a cause of action the judgment should not be affirmed.

The complaint alleges that the American Ice Company, a corporation organized under the laws of the State of New Jersey, had issued preferred and common stock, and on January 23, 1902, the board of directors of said company declared a dividend of one dollar per share upon the common stock of the American Ice Company, payable to stockholders of record at the close of business on February 1, 1902, which dividend was subsequently paid to the stockholders; that this dividend was not made or declared from the surplus or net profits arising from the business of the said American Ice Company and the said dividend was never earned by the said American Ice Company; that at the time of the declaration of this dividend the statutes of the

Page 527

State of New Jersey provided that no corporation should make a dividend except from the surplus or net profits arising from its business, nor divide, withdraw, or in any way pay to the stockholders or any of them any part of its capital stock, or reduce its capital stock, except according to the act, and in case of any violation of its provisions the directors under whose administration the same may happen should be jointly and severally liable, at any time within six years after paying such dividend, to the corporation, and to its creditors, in the event of its dissolution or insolvency, to the full amount of the dividend made or capital stock so divided, withdrawn, paid out or reduced, with interest on the same from the time such liability accrued, provided that any director who may have been absent when the same was done, or who may have dissented from the act or resolution by which the same was done, may exonerate himself from such liability by causing his dissent to be entered at large on the minutes of the directors at the time the same was done or forthwith after he shall have notice of the same, and by causing a true copy of such dissent to be published in certain newspapers. The complaint further alleges that the defendant John R. Bennett was a director of the American Ice Company between January 1, 1902, and March 1, 1902, and well knew that at the time the said dividend was declared the same had not been earned and was not declared from the surplus or net profits arising from the business of the said corporation; that the said defendants caused the fact of the declaration of the dividend to be published in the papers and to be disseminated among the public, and that none of the directors caused his dissent to be entered at large or otherwise on the minutes of the directors of the American Ice Company. There was no allegation that this defendant Bennett was present at the time the dividend was declared, voted for the dividend, or took any part in the action of the corporation in declaring a dividend. It is alleged that each of the directors intended that the said declaration of the said dividend should be regarded by the general public as a representation that the said dividend had been earned and declared from the surplus or net profits arising from the business of the said American Ice Company, and it is then alleged that at the time of the declaration

Page 528

of the said dividend each of the said directors well knew that the aforesaid representations were wholly false and that said representations were made with intent on the part of each of said directors to deceive the public and to induce the public to purchase shares of the common stock of the American Ice Company and that said directors conspired together for that purpose. It is also alleged that the plaintiffs, relying upon the said representations and believing them to be true, purchased on February 13, 1902, 100 shares of the common stock of the American Ice Company; on or about March fifth purchased 200 shares of the common stock of the American Ice Company; on or about April 28, 1900, purchased an additional 100 shares of said common stock; and on August 25, 1902, purchased a further 200 shares of the said common stock and paid therefor the sum of $12,675; that if the dividend mentioned in paragraph 5 of the complaint had been declared out of the surplus or net profits of the said American Ice Company each share of the common stock would have been worth $50 per share; that at the time of the declaration of the said dividend mentioned the common stock of the American Ice Company was intrinsically worthless and practically of no value; and that the market price of the said common stock subsequently 'declined to a point where said market price, as well as said intrinsic value of the said stock, is practically nothing.'

Thus the basis of the plaintiff's cause of action is that the directors of the American Ice Company by declaring a dividend on its common stock which was paid by the company represented that such dividend was to be paid out of its earnings and net profits; and without alleging that the defendant voted for such dividend or took any part in declaring it or made any representations about it, plaintiff seeks to hold this defendant for his loss in a speculation in the stock because the defendants knew that the dividend was not paid out of earnings or profits but intended that it should be understood by the public that it was paid out of earnings and profits. The corporation being organized under the laws of the State of New Jersey the legality of the acts of the directors must be determined by the laws of that State. The laws of that State prohibited the declaration of a dividend except from surplus or net profits arising

Page 529

from its business, and provided a penalty for a violation of this prohibition by making the directors under whose administration the same may happen jointly and severally liable to the corporation and to its creditors in the event of its dissolution or insolvency to the full amount of the dividend made or capital stock so divided. It is not alleged that this company has ever become insolvent, and the plaintiff is not a creditor. Nor do the plaintiffs seek to compel the directors to pay back to the company the amount of the dividend that they distributed to the stockholders in violation of the statute. They allege that the declaration of this dividend was a representation that it was paid out of net earnings or profits, but it is not alleged that the dividend was declared to be paid out of profits or earnings; that there was any direct representation by either the company or its directors that it was so paid; nothing but the bare allegation that a dividend was declared and paid by the company--how is not stated--and that, therefore, the plaintiffs are entitled to recover, not the amount of the dividend or the loss that the company sustained in consequence of the dividend having been declared, ...


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