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Lindgrove v. Schluter Co.

Court of Appeals of the State of New York
Jun 2, 1931
256 N.Y. 439 (N.Y. 1931)


Argued May 18, 1931

Decided June 2, 1931

Appeal from the Supreme Court, Appellate Division, Second Department.

Samuel Seabury for appellants. Conrad Saxe Keyes for respondent.

The first cause of action attempted to be stated makes these allegations:

The plaintiff and the defendant corporation, in October, 1926, entered into a contract, whereby the defendant employed the plaintiff to act as its vice-president, at an annual salary. The employment was to continue until such time as it might be terminated by the arrival of a day fixed for its termination by a three months' notice served by either party upon the other. The plaintiff was elected vice-president and continued in the performance of his duties as such officer until November 15th, 1927, when the defendant served notice of the termination of the employment.

The contract also provided for the purchase by the plaintiff, as of November 1st, 1926, of 2,000 shares of the common stock of the defendant corporation, at a price to be ascertained in a prescribed manner, which was afterwards calculated to be $64,757.20. This sum might be paid in installments, but the whole sum, together with interest, must be paid prior to November 1st, 1938. The shares were to be issued to the plaintiff and to be transferred by him to the defendant as security for the payment in full of the purchase price.

The contract, attached to the complaint and made a part thereof, as alleged in paragraph 8, provided that "until said stock should have been paid for in full, all ordinary or extraordinary dividends, whether in cash or in kind, on said stock declared after November 1st, 1926, should belong to the plaintiff but might be applied by the defendant company as paid upon any unpaid balance of the purchase price of said stock or interest due thereon at the time of the payment of such dividends; provided, however, that the plaintiff should have the right to have paid out to him up to 50% of any dividends declared in any one year, such payments, however, not to exceed $7,500 in amount in any one year."

On the 1st of November, 1926, certificates for 2,000 shares of the common stock of the defendant Schluter and Company, Inc., were issued to the plaintiff, who became the holder of record thereof, and were thereafter indorsed by the plaintiff in blank and deposited with the defendant corporation as security for the payment of the purchase price therefor. The defendant corporation, during the period from November 1st, 1926, to November 15th, 1927, the term of plaintiff's actual employment as vice-president, "earned large profits in cash and securities upon its capital stock to an amount, as plaintiff is informed and verily believes, in excess of $500,000." The proportion which accrued to the 2,000 shares owned by the plaintiff amounted to upwards of $118,000, or more than the full amount of the purchase price therefor. Nevertheless, the defendant corporation made no declaration of dividends.

The complaint contains an allegation that there was an implied agreement between the plaintiff and the defendant corporation "that dividends would be declared and paid upon said stock at reasonable intervals as and when earned thereon so that the plaintiff herein might have an opportunity of performing his contract of purchase and having applied thereon the sums of money or the amounts of property declared as dividends or earned thereon, and of thereby participating in the profits of said corporation."

The complaint also alleges "that in order to avoid the effect of the contract and to defraud the plaintiff of his share of the earnings of the defendant company, and to secure the services of the plaintiff at the salary provided for in said contract, without allotting to him his fair participation in the aforesaid profits of the company, defendant corporation, by Frederic E. Schluter, its President, terminated plaintiff's contract on the 15th day of November, 1927, without having declared any dividends upon said stock although the same had been earned."

The plaintiff claims that a contract obligation to declare dividends, resting upon the defendant corporation, is sufficiently shown by the matter appearing in paragraph 8 of the complaint, which we have quoted above. We think that the quoted words fail utterly to justify an inference that any such agreement was made. The paragraph asserts that the contract provided that dividends "should belong to the plaintiff" which might be "declared after November 1st, 1926;" that they "might be applied," by the defendant, upon any unpaid balance of the purchase price, "due thereon at the time of the payment of such dividends;" that the plaintiff "should have the right" to have paid out to him up to "50% of any dividends declared in any one year" not exceeding $7,500. Here is no promise made, either expressly or inferentially, that the defendant corporation will pay dividends. On the contrary, the words of the paragraph set forth nothing more than a contract provision, made on behalf of the corporation, that dividends, if declared, might in part be applied upon the debt of the plaintiff to the corporate defendant. Nor is there any other paragraph in the complaint or clause in the contract which justifies a conclusion that an obligation to declare dividends was undertaken by the defendant.

Even if the contract words disclosed the assumption of such an obligation, the plaintiff would not be helped. The directors of a corporation owe a duty to their stockholders to exercise an impartial judgment in reference to the declaration of dividends, and to declare them only when, under the existing circumstances, a declaration will seem best to serve the corporate interests; and no contract, engaging them unrestrictedly to declare dividends, can have any legal force. (Morawetz on Private Corporations, § 519; 1 Cook on Corporations [8th ed.], § 271; West v. Camden, 135 U.S. 507; Flaherty v. Cary, 62 App. Div. 116; 174 N.Y. 550.) "Such an agreement would be dishonest and illegal; it would be an agreement to commit a breach of trust." (Morawetz, supra.) What is true of contracts by directors is true of contracts by corporations, which may act only through directors. (6 Fletcher, Cyclopedia of the Law of Private Corporations, § 3659.) Consequently, the plaintiff has no contract right to have dividends declared, which may be enforced herein.

We think also that the first cause of action alleged states no right of the plaintiff as a stockholder of record to require a declaration of dividends which may be enforced in a court of equity. For one reason, the obligation sought to be stated is clearly contractual in nature, and not otherwise. Thus the only wrong asserted is that the defendant "terminated plaintiff's contract" without declaring dividends, "in order to avoid the effect of the contract." For another, there are no sufficient allegations of fact to indicate that the corporation's failure to declare dividends was grounded in bad faith, or actuated by a motive to injure, rather than benefit, its stockholders generally, or this plaintiff as a stockholder in particular. Moreover, the plaintiff, at the conclusion of his term of service as vice-president, was no longer entitled to assert that he was possessed of the rights of a stockholder, or that he ever had been. The complaint correctly states a provision of the contract to have been "that if, by reason of death or otherwise as provided in the contract, plaintiff should cease to be connected with the defendant company before the entire purchase of said stock should have been made as above provided, then and in that event the agreement of sale and purchase, so far as it related to such of the stock as should not at that time have been paid for, should be deemed canceled and of no effect and the defendant company might transfer the certificates for said stock free and clear of any claim by plaintiff under said contract." At the time when the plaintiff's services were terminated the plaintiff, so far as appears, had made no payments whatever for the stock. Therefore, at that time the contract of purchase became "canceled" and "of no effect." With the cancellation of his contract the plaintiff lost all title to the stock, and all rights, which may previously have been possessed by him, to have dividends declared.

The second cause of action alleges the purchase by the plaintiff of twenty additional shares of common stock of the defendant corporation but fails to assert that plaintiff has made payment in full therefor, so that the cause of action must be dismissed. The third cause of action stands, for the reason that the motion to dismiss was not directed thereto.

The order of the Appellate Division and that of the Special Term should be reversed and the question certified answered in the negative, with costs in all courts, and with leave to plaintiff to amend within twenty days on payment of costs.


Ordered accordingly.

Summaries of

Lindgrove v. Schluter Co.

Court of Appeals of the State of New York
Jun 2, 1931
256 N.Y. 439 (N.Y. 1931)
Case details for

Lindgrove v. Schluter Co.

Case Details

Full title:MARTIN S. LINDGROVE, Respondent, v. SCHLUTER AND COMPANY, INC., et al.…

Court:Court of Appeals of the State of New York

Date published: Jun 2, 1931


256 N.Y. 439 (N.Y. 1931)
176 N.E. 832

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