text:
    David E. Van Houten v. William Van Houten, Edward Van Houten, Mabel Van Houten and Frederick Van Houten.
    [Filed December 17th, 1904.]
    1. Complainant purchased lands and had the deed executed by the grantor to certain of his children, reserving a life estate to himself, drawn by his solicitor. It appeared that he had knowledge of the provisions of the deed, and intended it as an advancement to the children. — Held, that after thirteen years, and after his family had been broken up by dissensions, the complainant could not have the deed reformed, on the ground that his solicitor, by mistake, neglected to insert in the deed a power of revocation to complainant.
    2. This cause of action'was within the original jurisdiction of the court of chancery, and not within the act for quieting titles to real estate. Where such is the case, the complainant ought not to be allowed to exercise an option either to pursue his equitable remedy under the original jurisdiction of the court of chancery or to file a bill under the act for quieting titles. The legislature has no power to force a jury trial upon the court of chancery in cases within the original jurisdiction of the court, and make the determination of the jury in such cases as final as in courts of law.
    3. Limits within which suit may be brought under the act for quieting titles considered.
    On final hearing on bill, answer and proofs.

      Mr. Robert E. Van Hovenberg, for the complainant.

      Mr. Walter R. Hudson, for the defendants.
   Stevenson, V. C.

My conclusion is that the bill should be dismissed.

1. The bill does not present a case under the “Act to compel the determination of claims to real estate in certain causes and to quiet the title to the same” (3 Gen. Stat. p. 3486), as counsel for complainant has erroneously supposed, in conducting his proceedings in the cause. The case set forth in the bill of complaint and attempted to be proved is one of exclusive equitable cognizance under the original jurisdiction of the court of chancery. It is the case with which courts of equity have in recent times become quite familiar, where a voluntary grantor or donor undertakes to have Iris gift of real estate practically revoked and restored to himself. 1 Story Eq. Jur. (11th ed.) § 706b; Mulock v. Mulock, 31 N. J. Eq. (4 Stew.) 594, 602,; Garnsey v. Munday, 24 N. J. Eq. (9 C. E. Gr.) 243; White v. White, 60 N. J. Eq. (15 Dick.) 104, 115; Grant v. Baird, 61 N. J. Eq. (16 Dick.) 389.

The placing of the complainant’s case in the class to which it properly belongs is not, so far as the determination of the case is concerned, a matter of importance. The bill does not set forth only those matters which the statute requires a bill to quiet title to contain, while calling upon the defendants to “set forth and specify their title, claim or encumbrance,” &c. The true character of this case would have been made manifest if either party had demanded that an issue at law be framed and sent to a law court for trial in order to obtain the finality of a verdict of a jury, which the statute expressly prescribes. Any issue at law which might have been framed in this case would have been, in my judgment, entirely beyond the statute and wholly within the discretionary power of this court. A complainant in peaceable possession of land, and having an ample equitable remedy to remove a cloud on his title, ought not to be allowed to exercise an option either to pursue his equitable remedy under the original jurisdiction of the court of chancery, setting forth the whole controversy between himself and the defendant, or to file a bill to quiet his title under the statute in which he would call upon the defendant to set forth what would be purely an equitable controversy, and then have a jury in a court of law decide this controversy, or some essential part of it. Juries are not appropriate tribunals to determine purely equitable controversies. But apart from this consideration the legislature is not clothed with power, under our constitution, to force a jury trial upon the court of chancery, or to compel the court of chancery to submit those controversies of which it has original jurisdiction to the determination of a jury in a court of law, such determination having the attribute of finality to the same degree allowed in legal tribunals. Sanderson v. Sanderson, 52 N. J. Eq. (7 Dick.) 243, 246.

In the leading case of Jersey City v. Lembech, 31 N. J. Eq. (4 Stew.) 265, 272, the court of errors and appeals limits the apparently wide scope of the remedy provided by the statute above mentioned so as to exclude cases where the “party in possession of land can throw the hostile claim into a court of law and thus get rid of the cloud overhanging his estate.” The same reasoning, I think, is even more applicable to the exclusion of cases where the party in peaceable possession has a complete equitable remedy without invoking the statute, and the subject-matter of the controversy is beyond the cognizance of courts of law. Chief-Justice Beasley, in his opinion, in which he apparently speaks for the entire court, points out distinctly that the constitution of the state prevents the legislature from transferring to the court of chancerjr the exercise of powers vested in the courts of law, and also forbids the “transfer to a court of law of any matters of equitable cognizance.”

It is an amazing result, indeed, if suits for specific performance to convey real estate, suits to set aside deeds and mortgages on the ground of fraud and mistake, suits to establish trusts and innumerable other equity causes, can in large numbers of instances be displaced by the composite legal and equitable action prescribed by the statute which we are considering, in which statutory action many of the established rules of equity pleading and important presumptions of evidence are abrogated or reversed. All that would be necessary to secure this result if a literal construction of the statute is to 'be adopted, and the statute then is to be enforced, is to have the complainant in peaceable possession under claim of title, with no suit pending in which the defendant’s title or claim can be tested. It seems plain that the entire force of the reasoning of Chief-Justice Beasley, in the case of Jersey City v. Lembeck, excludes from the operation of this statute not only all cases where the party in peaceable possession can maintain an action at law to remove the alleged cloud on his title, but also all cases where such party can maintain a similar equitable action under the original jurisdiction of the court of chancery.

Notwithstanding the mistake of the counsel for complainant in classifying his case, no harm has resulted therefrom. The bill of complaint exhibits the whole controversy and the cause has been conducted according to the rules which govern the trial of equity causes, and without attempting to invoke any of the special provisions of the act to quiet titles, inserting in the bill the few brief special allegations prescribed by the statute — endorsing the bill as a bill to quiet title, issuing the tickets with the subpoena according to the provisions of section 2 of the statute — these things have not injuriously misled or otherwise harmed anyone interested in this cause.

2. The deed under examination was executed by Daniel Ackerman and wife to the four defendants and three other children of the complainant, since deceased, all of whom were infants, on January 15th, 1889, nearly twelve years before this suit was commenced. The complainant paid the entire consideration of the deed ($1,900), and apparently took possession of the property as a residence, with his family, and continued such residence down to the present time. In August, 1901, complainant’s wife and children, the defendants, or those of them who had not airead}1' left home, left the complainant in possession of the premises and established a residence elsewhere for themselves. The relations of the complainant with his wife and children evidently became in a measure hostile. He had previously lived somewhat unhappily with his wife on account of their quarrels.

When the deed was made, in 1889, the grantees, the children, appear to have had nothing to do with .the affair. The complainant selected his counsel, who has since deceased, and gave instructions for the deed. He was a man of some experience in business affairs, was able to read and write, and appears to have possessed a fair share of intelligence. There is nothing to suggest that he was not able to understand the deed which his counsel drew, and which he perused, at least in part. The deed, which is in form a warranty deed with the usual covenants, in which the grantor is the party of the first part and the grantees, the seven children of the complainant, constitute the party of the second part, contains a peculiar provision. The habendum is in the usual form — “To the only proper use, benefit and behoof of the said parties of the second part, their heirs and assigns forever.” Then comes the following:

“But particularly upon this express reservation and condition, that the right of the said parties of the second part to occupancy, and also all and any right of the said parties of the second part to the rents, issues and profits (or any such thing) of the said premises, shall be deferred until the demise of David E. Van Houten, the father of the said mentioned parties of the second part. And upon this condition is this conveyance executed, viz., that the said David E, Van Houten shall have, hold, occupy, use and enjoy the said above-granted premises, with the appurtenances and every part thereof, unto the said David E. Van Houten, for and during the natural life of the said David E. Van Houten, together with all rents, issues and profits thereof; , and upon the death of the said David E. Van Houten, but not before, shall all the rights of the parties of the second part (hereinabove reserved) become complete.”

The grantor also covenants that he has good right, &c., tO' convey the land “to the said parties of the second part and to and for their use and the present use of the said David E. Yan Houten, in the manner aforesaid.” The covenant of warranty also is “unto the said David E. Yan Houten for and during his natural life, and after his life unto the above-named parties of the second part.”

The complainant makes no objection to this deed because of its failure to make him a party in the usual way, and to vest in him by virtue of direct words of conveyance a life estate, which the whole instrument manifestly creates for his benefit. The complainant’s complaint is that he directed his solicitor “to draw the deed, and if possible, without interfering with the title” of the complainant, “include the children” of the complainant, “but not in such a way to make them the owners” of the land “or prevent him in any way from disposing of the said premises or mortgaging the same if he should at any time so desire,” the intent of the complainant “being to retain absolute control over said premises and the sole ownership thereof, so that he could dispose of or mortgage the same at any time if he should so wish.”

The bill further alleges that the solicitor informed the complainant that his instructions had been followed, and that thereupon the complainant “rested, satisfied in regard to said conveyance, and did not examine or read the same,” and that the complainant learned that his children, the defendants, were named as grantees in the conveyance after the death of his solicitor who drew the deed, and charges that the' making of the defendants as grantees in the deed was “an error on the part of his solicitor, the said deed being drawn in that way without the direction” of the complainant.

These latter allegations in the bill are not only not proved to be true, but are proved to be false. The complainant knew that his children were mentioned as grantees in this deed. He probably heard the whole deed read and admits that he read a portion of it. Before the deed was executed his attention was called to the fact that one of his children, who- were then seven in number, had been left out of tire deed, and thereupon he took the conveyance away from the grantor, in whose house the error was discovered, and had the name of one of the defendants, Edward Yan Houten, interlined as a grantee, the interlineation being duly noted by the complainant’s solicitor ' who made the same.

It certainly is a great difficulty in the way of the complainant that tire mistake which he undertakes to set forth in his bill, and upon which he bases his equity to have his voluntary deed set aside, is an entirely different sort of a mistake from the one which has some support in the proofs.

Casting aside the misrepresentations of the complainant in his bill, the question remains whether the complainant has a right to have this voluntary deed set aside because, he caused it to be made under a misapprehension of its exact legal effect, or because it contained no' power of revocation, or for any other reason on account of which courts of equity permit such gifts of land to be revoked.

I think it is quite plain that the gist of the real claim of the complainant entitled to consideration upon these proofs is that he did not intentionally deprive himself of the right to sell or exchange this land during his lifetime, which amounts to the claim that he did not know that the gift to his children subject to his life estate was irrevocable.

This deed is not, in my opinion, subject to any attack on the part of the complainant because it was not accompanied by a power of revocation, if the complainant fully understood its nature and effect. The gift is not shown to have been in the slightest degree improvident. The complainant admits that he desired and intended to make a settlement upon his children by his second marriage, certain children by a former marriage having been already provided for. The property was used and evidently intended to be used as a home for the complainant and his family. The conveyance secured this home to the complainant for his lifetime, removed it from the effect of any temptation which might assail the complainant to mortgage or sell the same, and insured the children upon the complainant’s dqath the absolute ownership of their home without the encumbrance of a dower-right which might give them trouble. The complainant’s wife, who was sworn as a witness for the defendants, testifies that in her quarrels with the complainant he would say: “Whose house are you living in? You will find out when my head is laid down. You will find yourself landed in the gutter.” The witness testified that the complainant “said this quite often,” and the complainant was not called to make any contradiction.

It is well settled that there is no presumption of a resulting trust where a deed is made to children for a consideration paid by their father. In such case the matter is open for investigation upon the evidence. 2 Pom. Eq. § 1041.

The question, therefore, in this case is narrowed down to the inquiry whether the complainant thought that there was a power of revocation in this deed, ox that, in spite of its terms, he had the practical power of revocation, which he swears it was his intention to reserve to- himself. This question of fact -upon this evidence I feel constrained to decide against the complainant. Speaking more accurately, I may say that the testimony, in my opinion, fails to sustain the complainant’s insistment.

I think it must be presumed in this case that the complainant read this deed and knew that his children were the grantees named therein, and that they became, under the deed, owners in fee, subject to a life estate in the complainant. Whatever may be said about the inartistic manner in which this deed is-drawn, there is nothing about it which, in my opinion, could possibly be unintelligible or in any way liable to mislead such a.' man as the complainant.

All the evidence in this case, in my opinion, is consistent with the theory that the-complainant, when his wife and children left him in August, 1902, regretted that he .had made this settlement upon his children in January, 1889, and in view of the change in his circumstances, desired to revoke the same. The question is whether in this ease a court of equity will set aside this settlement upon the uncorroborated testimony of the complainant that he thought, in spite of the plain provisions of this deed, which are such as to require no extraordinary intelligence to understand, that he (the complainant) in some way had the power to convey or mortgage this land for his own benefit at any time during his lifetime as he might see fit. The complainant never owned the land. lie knew that the title passed from Daniel Ackerman directly to his children. He must have known that what rights he had of necessity would have- to- be specified in the deed. It is quite important to note that the case might -be stronger for the complainant if he had owned the property and made this deed. A misapprehension of the rights which he would then have conveyed to his children would involve a similar misapprehension of the rights which he retained. But the ascextainment of all the complainant’s rights was more simple in this ease because the rights of all the parties passed from Daniel Ackerman, under the terms of this perfectly plain deed. Complainant’s story is not only without corroboration, but, in my opinion, is improbable.

Where a voluntary settlement upon children like- this is not improvident, and the absence of a power of revocation is natural, and the settlor, being reasonably intelligent, has procured the deed of settlement and is charged with tire knowledge of its perfectly plain provisions, which are such that any fairly intelligent person would understand, he cannot, in my opinion, come into a court of equity thirteen years after the settlement has been made and by his own uncorroborated oath compel the court to find that he did not understand the legal effect of the settlement, but in some mysterious way believed that he had during his lifetime absolute power of disposition over the land in question, although the deed of settlement was executed by a stranger and plainly contained no such power. In brief, the complainant by his unsupported oath cannot compel this court to believe an improbable story so as to procure the setting aside of this deed thirteen years after it was made, and after the man who drew it has deceased.

The view which I take of the evidence in this case makes it unnecessary to attempt any consideration of'the nature and exact definition of the jurisdiction of this court to set aside a voluntary conveyance of land made by a donor for lire benefit of children or other relatives “’in a ease unsmdrched by fraud” (Mulock v. Mulock, supra, p. 602). I do not think that the evidence in this case would justify any finding that the complainant’s gift when made did not exactly conform with his donative intention, .or that he acted under the slightest misapprehension of the nature and effect of the deed which he caused to be made to his children, which also to a large extent was for his own benefit. This conclusion of fact disposes of the theory upon which the bill of complaint was framed, but I may add that, in my opinion, the case exhibited by the proofs is not one where a court of equity will aid a donor to get back Ms gift because he has changed his mind. Hie complainant was fully competent in 1889 to make the absolute gift to his children which I think the evidence shows he then intended to make, and therefore that gift should not be revoked by a decree that its effect was to create a resulting trust for the complainant’s benefit.


source: Caselaw Access Project

author: Stevenson, V. C. (orally).

license: Public Domain

text:
    Morris H. Kronson v. Isaac Lipschitz.
    [Decided December 27th, 1904.]
    1. Where chattels are by bill of sale vested in one person for the benefit of another, and the latter then takes possession, the trust is executed, and he and those claiming under him will be recognized as the legal owners in courts of law.
    2. One may not protect his chattels from execution by causing them to be conveyed to another in trust at the time he buys them.
    3. The fact that, in an action involving title to personal property, one of the parties rests his claim on an equitable estoppel is not necessarily a ground for an injunction restraining the action and transferring the litigation to chancery.
    On motion for a preliminary injunction to restrain an action at law.

      Mr. John I. Weller, for the complainant.

      Mr. Michael J. Cannon, for the defendant.
   Stevenson, V. C. (orally).

I think the only question in this cause is whether the complainant can or cannot have the rights which he sets up in this suit enforced in the court of law in which the action of replevin between these parties is now pending. - The defendant, Lipschitz, claims title to the machinery by virtue of a bill of sale made in January, 1902. The complainant, Kronson, claims title to the same machinery bj' virtue of a bill of sale made to him, I think, a year later — in December, 1902 — and executed, not by Lipschitz, but by one Meyer Ilyman. The complainant claims that Meyer Hyman, his vendor, was the equitable owner of the property and became the equitable owner at the time of the bill of sale from the original owner, the Cosmopolitan company, to Lipschitz — the bill of sale that I have referred to, made in January, 1902. He alleges that Meyer Hyman furnished the consideration for that bill of sale; that Lipschitz paid no part of it; that the bill of sale was made to Lipschitz because Meyer Hyman did not wish to receive title on account of an injunction suit that was pending against him and which would ahcct his use of the machinery; that Lipschitz, therefore, was.a mere cover for Hyman, holding title for him without any beneficial interest whatever. In other words, the insistment of the complainant is that Lipschitz became the passive trustee for Hyman in holding title through this bill of sale to these chattels.

This is not a case where a chose in action is vested in A for the benefit of B; it is not a case where A has money in a savings bank deposited in his name, as trustee, for somebody else. Sometimes that sort of a trust is referred to as a simple or passive trust, but it is manifest that the trustee in all such cases where the subject-matter is a chose in action may have duties. He is the only man to collect; he is the only man with whom the contract is made, and in his name the contract must be enforced. But where you have chattels — machinery—vested by a bill of sale in A for the benefit of B, A has no duties to perform whatever, except to' preserve the chattels, in case he receives possession of them, until his beneficiary takes possession. The beneficiary is entitled to possession, and in my judgment the rule of law is that where the beneficiary, under a passive trust of chattels, takes possession of the chattels, then he is the legal owner. The trust is executed and he will be recognized as the legal owner in courts of law. A man cannot protect his chattels from execution, in my opinion, by refraining from having them conveyed to himself when he buys them, and causing them to be conveyed to some other person in trust for him while he takes possession. Such goods and chattels, I think, are leviable on a judgment of a court of law against the actual owner who is in possession.

It seems to me that the affidavits for the complainant make out just this .sort of a case. If these affidavits are true, Lipschitz took a bare legal title without paying a dollar of the consideration and took title for the benefit of Hyman, and at the time of the transaction, or subsequent thereto, Hyman took possession of the goods and chattels and put them into this partnership as his own property, and it makes no difference whether he lent them or whether he turned them in to discharge his obligation to contribute $1,000 of the capital. The result is just the same. He has acquired possession of them and he has transferred the possession of them to these partners. Subsequently he made a bill of sale, and .that transferred a legal title, which, in my opinion, every court of law should recognize. I do mot think that the courts of law of this state will refuse to recognize this sort of a title which is created through the instrumentality of a passive trust of chattels, where the trustee has no duty excepting to hold title, and possession of the chattels has been transferred to the beneficiary. I cannot hold that a court of law in this state will regard the beneficiary as having any but a full legal' title.

There is another branch of this case, another ground suggested on behalf of complainant, upon which to found his prayer for an injunction. It is suggested that there is here presented a foundation for a claim on the part of the complainant, Kronson, that although his legal title, by virtue of his bill of sale and the prior bill of sale in trust, may not be perfect for one reason or another, or may not be recognized in a court of law, yet both Lipschitz and Hyman are barred from asserting any title hostile to his by reason of an estoppel in pais — an equitable estoppel — and that presents the question whether, in ease an action is pending in which the title to personal property is in question, either party may apply to this court for an injunction to restrain the action and transfer the litigation to this court on the ground that he has a claim which is based upon an equitable estoppel against the other party.

Stating the question otherwise, the question is whether our courts of law will enforce equitable estoppels. It is well settled in this state that courts of law will recognize and enforce equitable estoppels in reference to both real and personal property. I referred a moment ago, during the argument, to the leading case of the Society for Establishing Useful Manufactures v. Lehigh Valley Railroad Co., 32 N. J. Eq. (5 Stew.) 329, which was decided twenty or twenty-five years ago, in which this matter is discussed in the court of errors and appeals by Chief-Justice Beasley, and the principle is there enunciated that courts of law will recognize equitable estoppels; but, under the peculiar circumstances of that case, the court of errors and appeals held that it was a proper subject of controversy — the qoarticular equitable estoppel set up there — to be determined in a court of equity, and therefore they permitted practically a transfer. But the opinion admits that in all simple cases the courts of law have ample jurisdiction, and in such cases there is no reason why this court should exercise its jurisdiction.

Now, here is a perfectly simple case. I do not think that there is much in the papers here that justifies this claim for an equitable estoppel. However, I have not examined the papers or considered this case in regard to that particular point, and I may be mistaken; but, in any case, the equitable estoppel claim is extremely simple. The court and jury can pass on it just as well as this court can, and I therefore think that, even if the complainant has that leg on which to stand his case, he can sustain his case just as firmly in a court of law as he can here.

Well, it may be said that the court of law may take a different view from that which I have indicated, and that is very true. I referred during the argument to another case — the case of Borcherling v. Ruchelshaus, 49 N. J. Eq. (4. Dick.) 340, decided in this court and in the court of errors and appeals about ten years ago. In that case an action was pending for mesne profits in a court of law. The .defence, at any rate, was set up of an equitable estoppel — an estoppel in pais. I may misstate the facts, but the principle I am quite sure I recall with accuracy. The court of law ruled that it could not take cognizance of that equitable estoppel. I think I may say here that probably the court of errors and appeals regarded this action of the lower court as erroneous. The party who was thus deprived of the benefit of his equitable estoppel then presented a bill in this court to restrain the entry of judgment upon the verdict which had been rendered in the court of law. The bill was demurred' to and the order overruling the demurrer was carried to the court of errors and appeals. The insistment was made on behalf of the defendant that the complainant ought to have carried the case from the law court by writ of error to the court of errors and appeals, but it was held that, inasmuch as the equitable estoppel had been excluded from the consideration of the court of law at the instance of the defendant, who was the plaintiff in the action in the law court, this court — the court of equity— would hold that it was res adjudicatei between the parties that there was no adequate remédy at law — that a court of law could not take cognizance of the particular equitable estoppel presented in that case; and that the complainant was not bound to carry the ruling of the law court to the court of errors and appeals. The decision was that this court would take the law of tire case as settled between the parties at the instance of the defendant. That is the gist of the case, and that position was sustained by the court of errors and appeals.

It is very unwise, in my opinion, for a court of equity, where these two systems of law and equity exist side by side, to undertake, where there is any doubt, to say in advance that the jurisdiction of the law court is limited in enforcing equitable estoppels and in dealing with such situations as I considered a little while ago, where there is a passive trust of chattels. A court of equity — this court — ought to be very cautious about adjudicating that the courts of law are not able to expand their remedial agencies. In all cases of doubt, where the law of the state is not settled adversely to the jurisdiction of the courts of law to recognize what are generally termed equitable rights and to grant what are classified as equitable remedies, as a general rule, I do not think that this court, the court of equity of the state, should intervene in a litigation pending in a law court and by an injunction transfer that litigation to this court, on the ground that in this court alone the equitable right of action or of defence can be recognized and enforced. In such cases it seems to me, as a rule, the injunction should be held off until the law court has been heard from.

The whole history of the development of our law of judicial decision shows a constaht expansion of the equitable power of courts of law. If you go back far enough you will find that the courts of law had no- jurisdiction of vast fields which they now fully o'ccupy, and in which it is not now necessary that courts of equity should intervene.

If this court of law lays down the rule to- the jury by which the jury in dealing with the evidence have the power to find the same estoppel in pais that can be found and enforced by this court on final hearing, the court of law is the appropriate tribunal where the final decision should be made between the parties. So far as can be ascertained from an examination of these ex parte affidavits, it would seem that there must be an enormous' amount of lying and perjury on one side or the other of this case. A jury is certainly an appropriate tribunal to deal with this conflict of testimony, and to determine which side is telling the truth — on which side the truth lies.

I was about to say that the whole case here may be tried to a finish between these parties in the law court, and the conflicting evidence inay be considered by a jury, and the propositions established by the verdict of a jury, which will determine the rights of these parties. But if the law court should take a different view of its powers and of its jurisdiction from that which I have-indicated, then, under the precedent established in the case of Borcherling v. Ruckelshaus, the complainant can come here and have an injunction restraining the enforcement of the judgment in the court of law, and resulting in bringing about a trial of the equity here which the law court, upon the hypothesis that I have stated, has declined to consider.

Now, it is true we have' some old legislation that goes back to a very early period, and which might make trouble in a cause like this. The statute to which I have just referred is section 6d of the present Chancery act (P. L. 1902 p. 553), which provides that no injunction shall issue restraining proceedings in a personal action at law after verdict, on application 'of the defendant, unless á sum of money is deposited or bond given. This is an old statute which perhaps might well have been modified in the recent revision of the Chancery act.

All hardship in this ease may be obviated in this way: I shall advise an order granting an injunction or imposing restraint which will not have the effect to' interfere with the prosecution of this present replevin suit until after verdict, and which will enjoin the defendant from proceeding after verdict without the further order of this court. If, then, this replevin suit is tried between the parties, and all their various rights are considered in the law court, and the verdict of the jury deals with all those rights and disposes of them, that will be the end of the matter. Then the plaintiff in the replevin suit, if successful, may apply to this court and get an order as of course vacating the restraint, and permitting the judgment to be entered and execution to issue. If, however, the law court should decide that it could not take cognizance of the various equitable rights set up by the complainant, then the judgment will remain arrested by the injunction which now will be granted, and the suit will proceed in this court, I think in that way all hardship will be obviated.


author: Stevenson, V. C.

text:
    Alfred E. Stevens v. United States Steel Corporation.
    [Filed January 17th, 1905.]
    1. In a suit to compel the declaration of a dividend on stock of a corporation, the corporation is a necessary defendant. The question whether the directors ought to have been made defendants is not raised by a demurrer to the bill for “want of equity.”
    2. In the absence of statutory provisions, the granting of dividends from profits is in the discretion of directors of trading corporations, subject to the intervention of equity for improper refusal.

      3. The Corporation act, as amended (P. L. 1901 p. 21/7 § 47), permits corporations, in the manner specified, to regulate the whole matter of the distribution of profits by dividends to stockholders; the statute prescribes the time, manner and extent of such distribution, but only in the absence of inconsistent regulations made by the corporation itself in accordance with the statutory requirement; the view that the statutory rule is rigid, except that the corporation, in the manner prescribed, may change the date of distribution, held erroneous.
    4. Directors are not required to declare dividends on common stock, as well as on preferred stock,' at a time when there are profits enough therefor, where it is not for the interest of the corporation, though such profits may otherwise be absorbed in future dividends on the preferred stock.
    On demurrer to bill.

      Mr. Richard V. Lindabury, for the demurrant.

      Mr. Alfred F. Stevens, pro se, contra.

   Stevenson, V. C.

The complainant, as the holder of thirty shares of the common stock of the defendant corporation, files his bill, on behalf of himself and other stockholders who may come into the suit, to compel the declaration of a dividend upon the common stock out of an alleged accumulation of profits amounting, in January, 1904, to sixty-six million dollars ($66,000,000). The entire capital stock consists of eleven million shares of one hundred dollars ($100) each, divided equally between preferred and common stock. Dividends have been paid from the organization of the company, in April, 1901, upon this entire stock of both classes, until January, 1904, the time for the regular declaration of a dividend on the common stock. Notwithstanding the above-mentioned accumulation of profits at that time, after duly caring for the dividend on the preferred stock, the dividend on the common stock was passed.

The demurrer is general in form, specifying as its sole ground the objection which usually is called, in brief, “want of equity.”

1. The defendant malees the preliminary objection that the directors of the corporation are the proper parties to such a suit as this, and that the corporation itself is not a proper party, or, at any rate, is not a proper party defendant.

Notwithstanding some dicta-, and possibly some decisions, in other states, to sustain the proposition that in a suit to compel the declaration of a dividend the corporation stands as a complainant rather than as a defendant, and the directors of the corporation are necessary defendants, I think it is plain, upon principle and upon authority in this state, that in every such suit the corporation is a necessary party defendant. It is difficult to see how the corporation, practically, could appear as complainant in such a suit if the directors who control the corporation are the defendants.

Until a dividend is declared the entire assets of the corporation, including surplus or accumulated profits in whatever form they exist, belong to the corporation,, and the corporation owes no debt in respect thereto to the stockholders as individuals. 2 Cook Corp. § 534- When, however, a dividend has been declared a debt at once becomes due from the corporation to'each stockholder, recoverable by each in a separate action at law. Jackson’s Administrators v. Newark Plank Road Co., 31 N. J. Law (2 Vr.) 277 (1865); King v. Paterson, &c., Railroad Co., 29 N. J. Law (5 Dutch.) 504 (1861).

A suit in a court of equity to fasten upon a corporation a debt to its stockholders which theretofore has not existed is instituted for the benefit of the stockholders severally as individuals, and if defended will naturally be defended by the ■ corporation as representing the interests of the stockholders as a body corporate in the prosecution of the corporate business, for which the assets are held, and which may be injuriously interfered with by any diminution of the assets.

The precedents in this state uniformly indicate that in such a suit the corporation is a proper party defendant. Laurel Springs Land Co. v. Fougeray, 50 N. J. Eq. (5 Dick.) 756 (1893); Griffing v. Griffing Iron Co., 61 N. J. Eq. (16 Dick.) 269 (1901). In the case of Trimble v. American Sugar Refining Co., 61 N. J. Eq. (16 Dick.) 340 (1901), although the demurrer to the bill was .sustained, the learned vice-chancellor (Pitney), in his opinion, does not suggest that the suit was improperly brought against the corporation as the sole party defendant.

The doctrine that directors are the trustees for stockholders, in my judgment, does not control a ease like this. That principle is often recognized where directors are violating their duty to the injury of the stockholders as a corporate body. The corporation is not injured by the retention of profits among its assets, which might be distributed and thus become the private, separate property of the stockholders. On the contrary, the corporation is enriched. The object of this suit is not to compel directors to do or refrain from doing something for the benefit of the corporation, but to do something for the benefit of the complaining stockholder which may be disadvantageous to the corporation.

To compel a stockholder in' a case like this, to make only the directors defendants would not only be contrary to principle, but would result, oftentimes, in difficult complications. The directors of the corporation might be wholly changed during the pendency of the suit. Directors often change during the progress of suits against corporations, the object of which is to fasten a liability upon a corporation by a decree of the court, which liability must be discharged by an application -oí the corporate assets. When the final decree has established such a liability, it becomes the duty of the board of directors in office at the time when such decree is rendered to take such action as may be necessary in order that the corporation may perform the duty imposed upon it by the decree.

The defendant has not assigned as a cause of demurrer the absence of the directors as necessary parties. At the final hearing the court, of its own motion, may arrest all proceedings in this cause until other parties shall be brought in if justice calls for such action, but it does not follow that if such result will inevitably ensue this demurrer, based on an alleged want of equity alone, should be sustained. If the demurrer had objected to the omission of the directors as parties defendant, the complainant would have had an opportunity to amend his lull before proceeding to the elaborate argument upon the merits which now has been had.

I think the true rule is that if this bill presents any case of equitable cognizance against the defendant, the United States Steel Corporation, on behalf of the complainant, the demurrer should be overruled unless a final decree in favor of the complainant would be practically of no value to the complainant. If upon the final hearing it appears that additional parties are necessary in order to satisfy and completely dispose of the controversy in this cause, such additional parties may then be brought in. McLaughlin v. Van Keuren, 21 N. J. Eq. (6 C. E. Gr.) 379 (1869); Wood v. Stover’s Administrators, 28 N. J. Eq. (1 Stew.) 248 (1877).

At present, under the form of this demurrer, it is not necessary to decide the question whether the directors of the defendant corporation ought to have been joined as parties defendant. It is enough to reach the conclusion that a final decree in this suit between this complainant and this defendant will settle an issue between them of great importance and ascertain and finally determine a right belonging to the successful party of very great value. Such final decree will make it res adjudicata between these parties whether or not a dividend on the common stock ought to be declared. I am unable to perceive any reason why this very important controversy cannot be completely and finally disposed of between these parties now before the court without injuriously affecting in the slightest degree the rights of any unrepresented party.

2. The bill presents no case apart from our statute (Corporation act, section 47), in which, under the general equity power of this court, the complainant is entitled to have a dividend declared on the common stock of the defendant corporation.

The general rule is well settled that the directors of trading corporations are invested with a wide discretionary power in regard to the distribution of profits in the form of dividends among the stockholders. Subject, of course, to provisions in the charter, and also to the by-laws of the company, it is for the directors to say whether profits shall be distributed to the stockholders or retained for the purpose of the corporate business. It is, however, equally well settled that this discretionary power is not absolute, and when the directors “improperly refuse to make a division of unused profits,” a court of equity will intervene on behalf of any stockholder who may complain. Laurel Springs Land Co. v. Fougeray, 50 N. J. Eq. (5 Dick.) 756, 759 760 (1893); Fougeray v. Cord, 50 N. J. Eq. (5 Dick.) 185, 197 (1892); Griffing v. Griffing Iron Co., 61 N. J. Eq. (16 Dick.) 269, 271; 2 Cook Corp. (4th ed.) § 545. These general principles must he kept in mind in dealing with, such statutes as those which a little later we are to construe. It does not follow that if the minority stockholders have not the benefit of a hard and fast statutory rule for the distribution of profits, that therefore they are exposed to permanent deprivation óf dividends, and that they must wait indefinitely and accept an increasing book value of their stock in place of the cash dividends which they would prefer to enjoy. The New Jersey cases above cited, as well as many eases in other states; illustrate how ample are the powers of courts of equity to enforce tire rights and satisfy the reasonable expectations of stockholders in the matter of the declaration of dividends when profits, which are not required to be retained for the purposes of the corporate business, including protection against emergencies, are unreasonably and unjustly allowed to remain undistributed.

Apart from a single argumentative allegation in this bill,' which will be hereinafter particularly dealt with, there are no facts set forth which show that the complainant and his fellow-stockholders have any right -whatever to compel a declaration of a dividend upon their stock, unless such right is created by a statute. The bill, however, sets forth the enormous sums of money which represent the capital of this corporation, the profits which it has distributed, and the accumulated profits -which the complainant says it is wrongfully withholding from distribution. Lest fallacious inferences should be drawn from a partial consideration of these facts, it is necessary to consider them as they are exhibited in the bill somewhat in detail. The mere statement that a corporation in January, 3904 — when, according to its bylaws and the statute of the state, a dividend might have been declared, if any dividend was due — was in possession of $66,-000,000 of accumulated profits would, by itself, probably create the impression in most minds that such dividend ought to have been declared. The accumulation is so enormous that, applying the ordinary standards by which we judge such things — standards derived from the experience of ordinary business men — it would seem as if under no possible state of facts could the retention of such an immense sum of money in profits be justified. And yet this accumulation ($66,000,000) is only six per cent.v upon the outstanding capital stock of the corporation, $1,100,-000,000. The allegations of the bill in regard to the payment of dividends upon the entire capital from the organization of the corporation, and the amount of those dividends, show beyond question that the corporation has been from the start in the possession of this great capital of .$1,100,000,000, and indicate that such capital must have been to a large extent, if not entirely, actually invested in the corporate business, so as to produce these great gains. The total dividends distributed from the organization of the business in April, 1901, down to January, 1904, a period of two years and nine months, amount to about $160,000,000, which sum, with the undistributed surplus above mentioned, makes the total profits earned by the corporation in this brief period over two hundred and twenty million dollars ($220,000,000).

The corporate objects cover a very wide range of business activity in which manifestly enormous amounts of capital may be invested, while the business of the corporation may be prosecuted all over the world.

It is evident that no inference can be drawn in favor of the complainant’s right, under general equitable principles, to have a dividend declared in January, 1904, from the mere fact that at that time' the accumulated profits, after providing for the dividend on the preferred stock, amounted to $66,000,000-. The situation would be precisely the same if we had before this court in this case a corporation organized for the manufacture of tinware in a country town, with an authorized and .outstanding capital of $11,000, represented by fifty-five shares of preferred stock and fifty-five shares of common stock, and with air accumulation of profits amounting to $660, and with perhaps just enough cash on hand to meet the requirements of current business.

As bearing upon any possible right of the complainant to a compulsory dividend based upon general equitable principles, it should be noted that the bill does not set forth in what form the $66,000,000 of accumulated profits existed in January, 1904. Possibly not a tenth of that amount existed as cash — as profits not only earned, but actually received, so as to be susceptible of distribution among tire stockholders in the form of dividends. Possibly nine-tenths of this immense sum was tied up in manufactured products, bills and accounts receivable, or in stocks or bonds of other corporations. In order to distribute these profits in the shape of cash dividends, large loans might be necessary, which would in the future be a menace to the corporation and its credit.

It also may be observed that the bill does not state that the $66,000,000, which is alleged to be the amount of the accumulation of profits inequitably withheld from distribution in January, 1904, has ever been actually received by the corporation. In paragraph 4 the bill alleges that in January, 1904, “the surplus accumulated from the net profits of the corporation was very large, and much greater than in the year 1901, when dividends were declared,” &c. In paragraph 7, however, the bill undertakes to deal specifically with the accumulation of each year, and alleges distinctly that such accumulation for the year 1901 was profits which the company had “earned,” and that the accumulations of the years 1902 and 1903 were “earnings.” Earned accumulated profits may be a very different thing for the purposes of distribution from accumulated profits. Earnings may be made without ever being received. See Park v. Grant Locomotive Works, 40 N. J. Eq. (13 Stew.) 114.

3. The gravamen of this bill lies in the claim that under section 47 of our Corporation act, as amended in 1901 (P. L. 1901 p. 246), the complainant and the other stockholders were entitled to have .a dividend declared by the directors of the corporation distributing “the whole of its accumulated profits.” This amended section reads as follows:

“Unless otherwise provided in the original or amended certificate of incorporation, or in a by-law adopted by a vote of at least a majority of the stockholders, the directors of every corporation created under this act shall, in January in each year, after reserving, over and above its capital stock paid in, as a working capital for said corporation, such sum, if any, as shall have been fixed by the stockholders, declare a dividend among its stockholders of the whole of its accumulated profits exceeding the amount so reserved, and pay the same to such stockholders on demand.”

The bill alleges that no working capital has been fixed by the stockholders or directors of the corporation to be reserved from distribution, and insists that the statute applies to and governs the situation, and that therefore the whole of the accumulated profits, as they stood in January, 1904, ought to have been declared as a dividend upon the common stock — the dividend upon the preferred stock having been duly set apart or paid.

Whatever may be the true, construction of the phrase “accumulated profits,” as used in a statute providing for distribution of what almost inevitably must in every such case as this be caspi, it should be observed that the bill does not employ the statutory phraseology without modifications, but distinctly alleges that the fund which it seeks to have wholly, or in part at least, distributed in dividends does not represent “accumulated profits” which have actually been received by the corporation, but only accumulated profits which have been “earned” by the corporation, and also that still more indefinite tiring termed “earnings.” 1 shall not, however, pause even to consider the effect of this peculiar phraseology of the bill in view of the scope of the argument which has been made on both sides, both orally and by briefs. I shall assume, as the argument on each side has assumed, that the bill intends to allege that in January, 1904, there was no working capital set apart by the stockholders or the directors, and there were “accumulated profits,” whatever that may mean, in whatever form such profits may have existed, amounting to about $66,000,000. I shall also assume, as the argument on each side seems to assume, that whatever the meaning of the term “accumulated profits” in such a statute as this may be, a bill is sufficient as a pleading which follows the words of the statute1, and alleges that “accumulated profits” in fact existed at the time when the bi.ll claims a dividend should have been declared.

With the above assumptions in favor of the complainant, his insistment is that the first three lines of section 47, above set forth', have a qualifying force solely upon the clause “in January in each year.” In other words, the mandate of the statute to declare the annual dividend cannot be affected by the certificate of incorporation, or by a by-law adopted by a majority of the stockholders, except as to the month of the year in which the transaction is to take place. The directors are obliged to declare a dividend of the whole accumulated profits, after deducting such “sum, if any, as shall have been fixed by the stockholders” as a working capital. They are obliged to do this annually. Complainant's counsel even insists that the action of the stockholders in fixing a sum as a working capital for the corporation to be set off from its profits is an act to be performed once for all, and not an act to be performed from time to time or annually. This extreme position need not be considered in this case, inasmuch as no working capital has been fixed either by the stockholders or by the directors.

The defendant insists that the meaning of the statute is that the directors shall attend to the business of distributing the accumulated profits of the corporation according to the provisions of this statute, unless provisions are made otherwise in the certificate of incorporation or in a by-law adopted by a vote of at least a majority of the stockholders, in which case such last-mentioned provisions shall prevail. In other words, the statutory rule is to prevail except so far as the same may be displaced by a rule laid down in the certificate of incorporation or in a by-law adopted by a majority of the stockholders.

In my opinion, the defendant's view is sustained not only by ‘ the correct grammatical construction of the statutory language, but by a consideration of the history of our statute and the situations to which its provisions must be applied.

Taking the statute as it now reads, I perceive no reason for applying the whole force of the word “otherwise” to the mere date of the transaction described in the section. What possible distinction in respect of the qualifying effect of this adverb can be drawn between a provision in a certificate or in a by-law providing that the annual distribution of dividends shall take place in July, instead of January, of every 3rear, and a similar provision directing that the distribution shall be of a portion of the accumulated profits, or that the dividend shall be payable three months after the declaration thereof and not on demand?

It js not necessary for the statute to confer upon corporations the power to regulate the matter of dividends by certificates of incorporation or by-laws. Without the express provisions of the statute, all corporations created under it would have full power to so act, not only by their certificates and their by-laws, but by ordinary resolutions of their boards of directors. When this statute undertakes to lay down a rule prescribing the amount of dividends to be declared, the time when they are to be declared and the time when such dividends shall be payable, which rule, however, is to be applicable unless the corporation shall provide otherwise in the exercise of the discretion which the corporation would have in the absence of tire statutory rule, the meaning of the statute appears to me to be free from doubt. The intention is that the statutory rule shall be the standing rule, applicable to all corporations in the absence of inconsistent rules which the corporations may see fit to pass in a certain specified way.

The history of the development of our statutory rule in regard to the declaration of corporate dividends, I think, very strongly indicates that after various legislative experiments, to which I shall refer in some detail, the intention of this last enactment of 1901 was to permit the whole matter of the distribution of profits to be regulated by the will of a majority of the stockholders, expressed in' a certificate of incorporation or a by-law.

The imposition of a rigid statutory rule controlling the distribution of profits by corporations is, I think, a device of very recent times, and, so far as I am aware, is peculiar to the legislation of New Jersey. In New York, and probably in other states, special statutory rules regulating dividends have been applied occasionally to special classes of corporations. Our New Jersey rule, in its more recent forms, certainly is a novelty, and may be regarded as a legislative experiment which perhaps has not been brought to a conclusion in this last statute of 1901.

The first attempt to legislate so as to protect stockholders in respect of their reasonable expectations of dividends seems to have been made as recently as the year 1866. P. L. 1866 p. 1034. This first statute applied only to “manufacturing corporations within this state.” Several questions as to the scope of this statute appear on its face. Down to this date, however (1866), the minority stockholder who objected to the decision of directors, who in good faith, in the interests of the corporate business, refrained from declaring dividends out of accumulated profits, had his remedy to realize his profits bjr sale of his stock— apparently a more valuable remedy than the same power to sell afforded him in many other instances in which the corporate business was not transacted so as to meet with his approval. The statute of 1866 permitted the board of directors of “manufacturing” corporations to specify a sum to be ¡reserved as a working-capital not exceeding one-half of the capital stock paid or secured to be paid, and then directed the distribution of the balance of “accumulated profits” annually on the 1st day of August, “unless some other specific day for that purpose be fixed in the charter.”

The act of 1866 was made section 52 of the revised Corporation act of 1875, with the relaxed rule that the annual dividend day might be’ fixed not only by the charter but by the by-laws. Rev. p. 186 § 52.

In 1891 the law was amended by attaching to it a proviso to the effect that “accumulated profits,” which consist in “real property” or merchandise necessarily employed in the business” of a corporation, should not be regarded as profits for the purpose of the declaration or payment of dividends, except so far as a majority of the directors or stockholders should by resolution provide. P. L. 1891 p. 176. This proviso seems to indicate that in 1891 the legislature regarded the provision in the former laws for setting off a working capital out of profits as an inadequate protection against the unjust demands of individual stockholders for cash, and perhaps surmised that the phrase “accumulated profits,” as used in the former laws, included more than profits so completely realized as to stand as cash, or the equivalent of cash, and might be deemed to have the same meaning as the phrase “accumulated surplus.” Whether “real property or merchandise necessarily employed in the business” of a corporation was capable of being set off as “working capital,” within the meaning of the statutes of 1866 and Í875, perhaps, was not clear to the draughtsman of the act of 1891.

The revised Corporation act of 1896 changed the statute under consideration in some important particulars. See Corporation act of 1896 § 47. The law was made applicable to every corporation created under the act. This certainly was a wide extension of the scope of the act, and removed from consideration the question under the former acts as to what was included in the term "manufacturing corporations.” The new statute committed the power of fixing a sum to be reserved from 'profits as a working capital to the stockholders, but provided that the corporation, by its certificate of incorporation or its by-laws, might give the directors power to fix the amount so to be reserved. The most significant change consisted in omitting the proviso which was attached to the law of 1891. Probably the fair inference is that the revisers of 1896 considered the power given to set off working capital as adequate to protect corporations from being- obliged, upon the demand of a single stockholder, to distribute profits which existed in the form of property "necessarily employed in the business” of the corporation.

In my judgment, a careful examination of the revised act of 1896 will show that the legislative experiment, in controlling the discretion of the managers of corporations in respect of the distribution of profits, was somewhat dangerous, and brought about a situation which was liable to be productive of mischief and exposed corporations to malicious and injurious attacks.

The consideration of a few of the most apparent defects in this law of 1896 strongly supports the construction which I have heretofore indicated as the proper one to be placed upon the statute of 1901. The stockholders are to fix a "sum to be reserved as a working capital.” If we assume that'the "sum” to be reserved need not be in the form of money, still the reservation must be made in good faith in order to provide a "working capital.” The power to reserve property for a "working capital” could not be exercised merely for the purpose of preventing the declaration of a dividend. Large accumulations of profits might exist in the form of property which in no sense could be deemed working capital, but which could not be distributed without enormous loss. Park v. Grant Locomotive Works, supra.

The greatest danger to many of the largest corporations of the state,’ under the law of 1896, and under this law of 1901, if, as the complainant contends, the majority of the stockholders, through a certificate or a by-law, are unable to save themselves and their corporation from such danger, arises from the use of the phrase “accumulated profits,” which has come down through all these statutes from 1866.

The phrase “accumulated surplus,” as used in statutes regulating the assessment of corporate property, has been defined in a series of decisions in this state. Trenton Iron Co. v. Yard, 12 N. J. Law (13 Vr.) 357; Mutual Benefit Life Insurance Co. v. Utter, 34 N. J. Law (5 Vr.) 489. In the latter case Mr. Justice Van Syckel, speaking for the court of errors and appeals, says (at p. 493) : “The term accumulated surplus, in its application to stock conrpanies, is well understood to refer to tire fund they have in excess of their capital and liabilities.” .

' Counsel for complainant, in his argument, as I understand it, practically insists that “accumulated profits” in this statute, providing for what must almost in every case be a distribution of cash, is the same thing as “accumulated surplus,” as defined by Mr. Justice Van Syckel. If this view is correct, the danger of tire large corporations of the state, under the act of 1896, must have been perfectly plain to the revisers of that act in 1901. A corporation, at the demand of a single stockholder, might be obliged to sell a large portion of its assets at a ruinous loss, or in anticipation of the sale of those assets make large loans of money, which would greatly injure its credit, in order to effect a distribution of profits which were merely exhibited on paper as the result of the action of accountants and appraisers— profits which had in fact not been realized and which might turn out never in fact to have been earned. A perfectly honest stocktaking, as of December 31st, 1903, might show that the United States Steel Corporation had air “accumulated surplus” which might also be deemed “accumulated profits” to the extent of $66,000,000. If a distribution of $66,000,000 thereupon became necessary in January, 1904, it is possible that a decline in the value of the stock on hand of the corporation, and the failure of some of its debtors, might wipe out a large part of the profits before the dividend cheeks had been cashed.

Moreover, after this unfortunate situation had-been created by an honest attempt to obey the law, the directors of the corporation might find themselves subject to a demand, under section 30 of the Corporation act, that they personally replace in the treasury a large part of the dividends which they had distributed to the stockholders. Appleton v. Malting Company, 65 N. J. Eq. (20 Dick.) 375; P. L. 1904 p. 276 § 2. Directors, who must obey the mandate of section 47, construed according to our present supposition, and also the prohibition of section 30, as construed by the court of errors and appeals in the above-stated case, certainly seem to occupy a difficult and uncomfortable position.

. But let it be supposed that the term “accumulated profits” is to be construed as meaning something different from the term “accumulated surplus.” It certainly seems reasonable to hold that the phrase “accumulated surplus,” as used in a tax act dealing with the value of property at a certain date, means a widely different thing from the phrase “accumulated profits” as used in a statute providing for the distribution of profits in cash among stockholders. There seems to be great force in the argument that this series of New Jersey statutes did not attempt to foist upon a corporation an annual indebtedness to its stockholders enforceable at law and payable on demand in cash equal to the surplus or profits, or net profits, which might appear on paper as the result of the annual stocktaking.

What our statutes, I think, have tried to do has been to regulate the discretion of directors in declaring dividends by laying down a convenient rule defining a situation in which stockholders may justly claim that dividends have been “improperly” withheld. I know of no rule of equity which requires directors to sell property of the corporation at a loss, or borrow money in order to pay dividends, because an appraisement of the corporate assets exhibits a surplus or what bookkeepers might call profits.

It must be borne in mind that the statute makes any dividend which may be declared payable on demand. The bill of complaint, to avoid the hardship of its claim that the “net surplus, as shown by the books of the company” in January, 1904, after providing for the dividend on the preferred stock, “should have been declared as a dividend * * * to the common stockholders,” concedes that such dividend should be made “payable at convenient datesBut it is plain that there is no warrant in the statute for such a provision postponing the payment of the dividend. The statute is defining a duty to pay out profits in cash on demand, and that fact strongly indicates that the statute is defining a situation in which profits exist practically as cash on hand', so as to be capable of distribution.

Counsel for complainant, anticipating that the view might not be adopted that the entire $66,000;000 of accumulated profits, according to the books of the defendant, should have been distributed in dividends to the common stockholders, argues that, at any rate, this court should hold the bill in order- to ascertain the amount of “accumulated profits” which in January, 1904, were, or at the present time are, subject to distribution in dividends under a proper construction of that statutory phrase, and then order such dividend to be made. The very great difficulty of the work thus attempted to be put upon this court, and the litigations, bona fide and malicious, made possible if this court were obliged to perform such a work, present a forcible argument in favor of the construction which I have placed upon the act of 1901.

What are profits? How are profits to be distinguished from the assets in which they are merged until they are in some way set apart or earmarked by the corporation or its officers or directors by whom the assets are held ? With large profits exhibited on the books, possibly all the cash on hand or readily obtainable, without loss, would represent capital only. In the case of this defendant corporation, it is fair to presume that the amount of capital kept on hand in the form of cash, considered absolutely, is an immense sum of money. If the statute imposes upon directors the duty to stockholders of using due diligence to realize profits in cash, -so as to make distribution possible, by what rule is the amount to- be so realized to be ascertained by a court? The general rule of courts of equity heretofore referred to, applicable to such a situation, might be formulated and enforced, but the question is, what is the statutory rule to determine the amount of “accumulated profits” when the difference between assets and liabilities, including the capital stock of the defendant corporation, is $66,000,000 ? If the statutory rule which directs the annual distribution by a corporation of the “whole of its accumulated profits,” after setting off the working capital which has been fixed by the stockholders, only means that such part of its accumulated surplus shall be so distributed as the directors, in good faith, exercising a sound discretion,-adjudge capable of being surrendered by the corporation to the stockholders without injury to its business, then it is manifest that no case, under the statute, is presented by the complainant’s bill.

The very great difficulty of interpreting and applying our statute, in case the- phrase “accumulated profits” is to be considered as meaning something different from the phrase “accumulated surplus,” is illustrated in the case of Park v. Grant Locomotive Works, 40 N. J. Eq. (13 Stew.) 114, decided by Vice-Chancellor Van Fleet in 1885. In that case it was a contract and not a statute which had to be construed. The corporation was under a contractual obligation to distribute annually “all the net profits of the company,” after the payment of taxes, insurance and expense of maintenance. The directors distributed $105,000 of profits, but retained $305,000, which the complainant sought to have divided according to the contract. The learned vice-chancellor held that the words “net profits,” as used in the contract, did not mean “the whole sum as appearing as net profits on any annual statement if such sum represented securities taken by the coqooration in the course of its business which were not yet due, but which could not be converted except at a price much less than that which the corporation had given for them,” but, on the contrary, meant “net gains which had been actually realized or which could be quickly realized without loss by a sale of assets representing the profits.” This case points out distinctly the difference between actual or realized profits and anticipated or earned profits, and supports the view that a contract or a statute which binds directors to charge their corporation with a debt to its stockholders, immediately payable in cash, because of the possession of net profits or accumulated profits, should be construed to have in contemplation profits which exist practically in cash, i. e., in the form in which they must be paid out.

If a construction should be placed upon the phrase “accumulated profits” in our statute similar to that which was placed by Vice-Chancellor Van Fleet upon the phrase “net profits” in the contract which was before him in the above-cited case, then it seems to me in this case, and in large numbers of other cases which are liable to come up, a most delicate and difficult task will be assigned to the court of chancery, and the court of chancery will be asked to place itself in the seats of the directors and decide important questions relating to the management of their corporations, which, according to a well-settled principle^ a court of equity invariably declines to consider or decide. In my opinion, it was the intention of the act of 1901 to so amend tire law of the state that a majority of the stockholders of a corporation could exercise the power, in a certain specified way, of preventing any one stockholder from bringing a vexatious suit whenever the annual balance sheet showed accumulated profits, and in such suit casting upon the court of chancery the difficult task above referred to.

Viewing the situations to- which any statutory rule for the distribution of the profits of corporations would be applicable, and especially the situation of tírese immense aggregations of capital invested in widely variant forms of property, often of fluctuating value, which long after 1866 began to come under the control of our corporation law, I think tire conclusion is unavoidable that the legislature of 1901 recognized that the general rule prevailing in other jurisdictions should be adopted, or rather readopted, in New Jersey — the rule which allows the majority of the stockholders of a corporation, acting in good faith, to control the business of declaring dividends, and provides a means whereby such majority can limit the power of a single stockholder to sue for an annual distribution of “accumulated profits,” as they are made to appear on paper, to cases of bad faith or gross abuse of discretion. This change in our law was made by transposing and altering the phraseology of the statute. Down to 1901 every statute made its rule as to annual dividends alterable by the corporation only as to the time in the year when such dividends must be declared. The plain grammatical meaning of the act of 1901 was in this respect changed, and, in my opinion, such change was made for good reasons to carry out tire legislative intent which I have indicated. This is. not a case, it seems to me, where, it is possible to conclude that, notwithstanding the change in tire wording of the revised law, no change of tire meaning of tire law was intended.

4. The question is now presented whether, in the case of this defendant corporation, the statutory rule governing the distribution of dividends has in fact been displaced by inconsistent rules in the amended certificate of incorporation, or in a by-law adopted by a majority of the stockholders. It appears distinctly L from the bill of complaint (see particularly paragraphs 2 and 3) that the defendant corporation was organized subject in all respects to the amended law of 1901. I think, in the absence of any allegation to the contrary, the fair inference from the bill is that the amended certificate of incorporation was filed before any of the capital stock, including that portion which the complainant now holds, was issued. The bill does not in. terms allege that the by-laws of the corporation which it sets forth were adopted by a vote of the majority of the stockholders, but under well-settled rules of pleading I think that the bill must be deemed to- admit that these by-laws were enacted in that way.. The bill alleges that the by-laws were- passed by the corporation, and that they “are said to do away with the effect of section 47” of the Corporation act, as amended in 1901. After reciting the by-laws, the bill undertakes to show that the same “are not effectual to accomplish the purpose for which they are said to be intended,” and then proceeds to state the reasons why they should not be deemed -effectual to that end. There is no suggestion that the by-laws did not displace the statutory rule because they were not adopted by a vote of a majority of the stockholders. No such claim has been made in the elaborate and minute argument, oral and by brief, submitted on behalf of the complainant. Upon the perusal of the bill it is evident that there is no intention to claim on behalf of the complainant that the by-laws were inefficient to accomplish their purpose because they were not adopted by a majority vote of the stockholders. This is not a case where, in the- absence of a specification in the demurrer, an objection to the bill is excluded from consideration. This is a case where the presumption contra preferentem is applied in accordance with common sense to exclude from consideration a case which manifestly the bill does not intend to present.

I do not stop to see whether the inference should be drawn from the bill that these by-laws were adopted prior to the original issue of the complainant’s stock. The bill does not allege that either the amended certificate or the by-laws came into existence after the stock had been issued. The matter hardly seems worth consideration, because the complainant’s stock was beyond all doubt issued subject to the provisions of the act of 1901, and, under the construction which I have placed upon that act, was subject, in respect of tire declaration and payment of dividends, to such rules displacing the 'statutory rule as the requisite majority of the stockholders might thereafter see fit to lay down by means either of an amended certificate of incorporation or a by-law.' •

The amended certificate provides as follows:

“The board of directors shall have power from time to time to fix and to determine and to vary the amount of the working capital of the company ; and to direct and determine the use and disposition of any surplus or net profits over and above the capital stock paid in; and in its discretion, the board of directors may use and apply”

any such surplus or accumulated profits in purchasing or “acquiring its bonds or other obligations, or shares of its own” capital stock, to such extent and in such manner and upon such “terms as the board of directors shall deem expedient.”

The sections of the by-laws which we have to construe, and which are set forth in the bill of complaint, are as follows:

“Section 5. Dividends. The board of directors may declare dividends from the surplus or net profits of the company.
“The dates for the declaration of dividends upon the preferred stock and upon the common stock of the company shall be the days by these, by-laws fixed for the regular monthly meetings of the board of directors in the months of April, July, October and January in each year, on which days the board of directors, in its discretion, shall declare what, if any, dividends shall be declared upon the preferred stock and the common stock, or either of such stocks.
“The dividends upon the preferred stock, if declared, severally and respectively, shall be payable quarterly, upon the fifteenth day of May, of August, of November and of February in each year.
“The dividends upon the common stock, if declared, severally and respectively, shall be payable quarterly, on the thirtieth day of June, of September, of December and of March in each year.
“If the date herein appointed for the payment of any dividend shall in any year fall upon a legal holiday, then the dividend payable on such date shall be paid on the next day not a legal holiday.
“Section 6. Working Capital. The directors shall not be required, in January in each year, after reserving, over and above its capital stock paid in, as a working capital for said corporation, such sum, if any, as shall have been fixed by the stockholders, to declare a dividend among its stockholders of the whole of its accumulated profits exceeding- the amount so reserved, and pay the same to such stockholders on demand; but the board of directors mas, fix a sum, which may be set aside or reserved, over and above the company’s capital paid in, as a working capital for the company, and from time to time they may increase, diminish and vary the same, in their absolute judgment and discretion.”

I shall not undertake in this opinion, the limits of which have perhaps already been- unnecessarily extended, to examine minutely the numerous clauses above set forth -from the amended certificate, and from the by-laws,' which relate to- the-- declaration and payment of dividends. In my judgment, they- fully cover the whole subject and displace the statutory rule.

5. An argument has been urged upon the court in favor of the complainant growing out of the existence of preferred stock and the relation of preferred stock to common stock in respect of the distribution of profits as dividends. It is claimed that the 1 preferred stock, although cumulative, and thus intercepting all existing profits so far as may be necessary for the payment of past-due dividends, cannot in equity receive the benefit of an-accumulation of profits which have been held back from distribution among the common stockholders. In other words, it is1-'' argued that directors have no right to accumulate profits, after satisfying the dividends which have accrued upon the preferred stock, and hold this accumulation as a guarantee fund to secure to the preferred stockholders their future dividends. It is in- l' sisted that the issuing of preferred cumulative stock has imposed upon directors of a corporation having both kinds of stock a special duty to the holders of the common stock which otherwise would not exist- — a duty which may at times imperatively call for the declaration of a dividend on the common stock, although in ease there were but one kind of stock such dividends might, in the discretion of the same directors, be withheld.

I do not find it necessary to enter upon the consideration of the interesting questions which are thus suggested, because the bill does not charge that the directors of this defendant corporation are intentionally accumulating profits in order to benefit the preferred stockholders; nor does the bill allege any facts from which any such intent on the part of the directors to favor the preferred stockholders can be inferred, or any facts from which the inference could be drawn apart from the intent of the directors that the effect of this accumulation is not to accomplish a wise and useful purpose relating to the corporate business, but only to thus favor the preferred stockholders by supplying them with a so-called guarantee fund. Even conceding that the existence of two kinds of stock imposes upon directors some such special duty as that for which the complainant contends, it does not follow that directors are bound1 at all times or at stated times to pay out all profits which may be capable of application to dividends on the common stock, in payment of such dividends, in order to prevent the possibility of such profits being absorbed in the future by the preferred stockholders. Accepting tire complainant’s argument as sound, the conclusion would seem to be substantially to this effect: that while directors, in holding back profits for emergencies, or for use in the business of the corporation, or because they are not in a form to be distributed without lossj must have due regard to the equity of the holders of the common stock against the holders of the preferred stock which we are now assuming to exist, they are bound still to take care of the interests of the corporation, and those interests plainly are paramount to this alleged equity.

We have seen that the mere fact that earned profits, whatever they may be, and in whatever shape they may exist, remain undistributed to the extent of six per cent, of the capital stock of the corporation is not of itself significant of any improper refusal of the directors to declare and pay a dividend out of this fund. The bill, yielding to the fallacy which consists in considering $66,000,000 absolutely as an immense sum of money, argumentatively

“insists that the large accumulation o£ surplus and comparatively small rate of dividends heretofore paid on the common stock, and their subsequent reduction and final discontinuance, indicate a fixed policy on the part of the United States Steel Corporation to favor the interests of its preferred stockholders, to the detriment of its common stockholders, which the action of this court alone can remedy by directing the payment of a proper dividend from the surplus on hand in January, 1904, to the common stockholders of said corporation.”

The bill does not allege a single fact which shows that the re- ]/ tention of these accumulated profits ($66,000,000), which, when • expressed in terms of money, are in fact a small sum when compared with the capital of the corporation invested in its business, is not justified by the nature of the assets of the corporation in which the accumulated profits are invested and the requirements of the business operations of the company.

The demurrer will be sustained.