CORPORATION LAW | B2015

CASE DIGESTS

Mclaran v. Crescent Planning Mill
Co.
1906
Norton, J.
Raeses, Roberto Miguel O.

SUMMARY: Crescent declared dividends payable in four installments.
It paid the first but refused to pay the second, as a new resolution of
Crescents BoD rescinded the declaration of dividends upon finding
out that the companys financial condition was slightly worse than
what was known. The plaintiff, a stockholder, asked that the second
installment be paid. The court ruled in his favor.

DOCTRINE:
1. Mere declaration of the dividend, without more, by
competent authority under proper circumstances, creates a
debt against the corporation in favor of the stockholders the
same as any other general creditor of the concern: whereas,
the setting apart of a fund after or concurrent with the
declaration, out of which the debt thus created is to be paid,
passes one step further toward securing the payment of the
identical fund to the stockholder inasmuch as the law treats
the setting apart of such fund as a payment to the corporation
as trustee for the use of the stockholder, on which fund the
stockholder has a lien, and to which funds he has rights
superior to the general creditor.

2. By mere declaration, the dividend becomes immediately fixed
and absolute in the stockholder and from henceforth the
right of each individual stockholder is changed by the act of
declaration from that of partner and part owner of the
corporate property to a status absolutely adverse to every
other stockholder and to the corporation itself, in so far as his
pro rata proportion of the dividend is concerned.

3. A cash dividend, properly declared, cannot be revoked by the
subsequent action of the corporation.


FACTS: On Feb. 7, 1903, the BoD of Crescent Planning Mill Co. adopted
the following resolutions:
1. Declare a dividend of six percent.
2. Dividends to be divided into four payments of 1 % each,
payable Feb. 15, April 1, July 1, and Oct. 1, 1903.

No further resolution was passed nor were steps taken to set apart a
fund out of which the dividends were to be paid.
1. It should be noted that the company was solvent at that time
($10k undivided profits, $29k surplus).

Despite the fact that no separate fund was set aside, officers of the
company paid plaintiff and the other stockholders the first installment
of the dividend.
1. The second installment, however, was not paid.
2. It was found out that the financial condition of the company
was $6k less than what had been understood.
a. This reduced the surplus from $29k to $23k.
3. The board, in its resolution on April 11, was then prompted to
rescind the payment of the remaining installments of
dividends, including the second installment.
a. It is, again, worth noting that the company was still
solvent, as it had a comfortable surplus of $20k.

Plaintiff requested payments of the installment falling due on April 1.
This was refused.
1. Resolution of the BoD on April 11 superseded declaration of
dividends.

The plaintiff then filed suit. The lower court found for the plaintiff.
1. However, he was substituted by his counsel Mclaran upon his
death.

ISSUE:
1. WON the mere declaration of a dividend by a solvent
corporation creates a debt in favor of the stockholder and
CORPORATION LAW | B2015
CASE DIGESTS

against such corporation for the amount of such dividend in
the absence of further express action on the part of the BoD.
2. WON a corporation may rescind and recall the payment of
installment dividends yet unpaid after having declared the
dividend.

RULING:
1. YES. A declaration is enough.
2. NO. Since a declaration of dividend creates a debt against the
corporation and in favor of the stockholder, it is a generally
known principle that a debtor cannot rescind, recall, or revoke
such declaration of dividends.

RATIO:
1. Counsel for appellant, from the definitions he cited regarding
the word dividend, predicates his argument that a resolution
declaring a dividend is not sufficient to create a dividend.
a. A resolution declaring a dividend, to be effectual, must
be accompanied with competent action, like setting
aside a fund from which such could be paid.
i. Until such fund is set aside, no dividend has
been declared, and therefore it is competent
for an authority to rescind or recall the former
action.
2. It has been adjudicated that when moneys for the payment of
of such dividends are not set apart for the payment thereof, but
are permitted to remain in the corpus of such corporate estate,
the stockholder stands as general creditor of the concern in
bankruptcy who can come in only notably with such creditors,
looking to the general estate for liquidation of his dividend
debt.
a. This is the principle that the declaration of the
dividends operating as a severance thereof from the
stock in the general mass of the corporate property.
i. The converse of this principle has been
applied in cases where the dividend has been
declared and a fund set apart out of which to
pay the same.
1. Such action of setting aside
constitutes such moneys a trust fund
in the hands of the corporation for
use of the stockholders.
2. In the event of bankruptcy,
stockholders are not required to go
pro rata.
3. [See doctrine no. 1] Mere declaration of the dividends,
without the setting aside of the fund, creates a debt.
a. The use of terms set aside, set apart, and actually
set apart in the definitions of dividends means that
the act of declaring is, ipso facto, the setting aside
itself.
4. [See doctrine no. 2]
5. It is therefore clear that a cash dividend, properly declared,
cannot be revoked by the subsequent action of the
corporation.
a. As the corporation has become the debtor, the debtor
cannot revoke, recall, or rescind a debt.
6. Ford v. East Hampton Rubber Thread Co. is not applicable
a. In that case, the BoD declared a dividend but
rescinded such before notifying the stockholders and
that no fund had been set apart for the payment of
such dividends.
b. Unlike the CAB, no debt weas created there.

DISPOSITIVE: Judgment affirmed.