October 24, 1940.
Action by C. Walter Randall, as trustee of the Bush Terminal Company, debtor, against Frank Bailey and others to recover on behalf of the debtor the amount of dividends declared and paid by defendants, former directors of the debtor. Defendants filed motions for judgment at the close of the whole case.
Motions granted and entry of judgment directed for defendants.
Root, Clark, Buckner Ballantine, of New York City (John M. Harlan, James E. Nickerson, and Ray I. Hardin, all of New York City, of counsel), for plaintiff.
Holthusen Pinkham, of New York City (Spencer Pinkham, Henry F. Holthusen, and Charles E. Oberle, all of New York City, of counsel), for Frank Bailey, James G. Harbord, Harry B. Lake, Matthew S. Sloan, Estates of F.J. Lisman and Clinton D. Burdick.
Kellogg, Emery Inness-Brown, of New York City (David Paine, George Koegler, and M.A. Crusius, all of New York City, of counsel), for Title Guarantee Trust Co., as Ancillary Executor of Edward T. Bedford, deceased.
Hays, St. John, Abramson Schulman, of New York City (Arthur Garfield Hays and Morris Shilensky, both of New York City, of counsel), for Irving T. Bush.
A trustee of Bush Terminal Company, appointed in a proceeding under Section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207, here sues former directors of that company to recover on its behalf the amount of dividends declared and paid between November 22, 1928, and May 2, 1932, aggregating $3,639,058.06. At the times of the declarations and payments, the company's books concededly showed a surplus which ranged from not less than $4,378,554.83 on December 31, 1927, down to not less than $2,199,486.77 on April 30, 1932. The plaintiff claims, however, that in fact there was no surplus, that the capital was actually impaired to an amount greater than the amount of the dividends, and that the directors consequently are personally liable to the corporation for the amount thereof under Section 58 of the Stock Corporation Law. Defendants claim that there was no impairment of capital and that the surplus was actually greater than the amount which plaintiff concedes as the amount shown by the books.
The claims of the plaintiff, although branching out to a multitude of items, are basically reducible to four:
1. It was improper to "write-up" the land values above cost and thereby take unrealized appreciation into account.
2. It was improper not to "write-down" to actual value the cost of investments in and advances to subsidiaries and thereby fail to take unrealized depreciation into account.
3. It was improper to include as an asset an item of so-called good will, which the company carried at $3,000,000.
4. It was improper to include as an asset $492,958.30, being the cost of properties which had been demolished.
I discuss first the item of good will.
On March 6, 1902, shortly after its organization, the Bush Terminal Company entered into a contract with Irving T. Bush, who owned or controlled Bush Company, Ltd., which was then conducting a terminal enterprise in Brooklyn, and either under that contract or some arrangement constituting in effect a modification of it or a waiver of strict performance thereof, Bush Terminal Company issued $2,000,000 face amount of bonds and $3,000,000 par value of stock and received in addition to certain services of Irving T. Bush a large tract of land nearly contiguous to that owned by Bush Company, Ltd., and equipped with piers and warehouses, and other terminal facilities, and a lease by Bush Company, Ltd., of two of the piers. The $3,000,000 of stock was not entered upon the books of the company until December, 1905, and then, under the same date, there was entered on the asset side of the ledger an item of good will in the same amount. It does not appear that that was done pursuant to any formal action of the board of directors fixing $3,000,000 as the value of any good will, but it does appear that the directors did in fact sanction the fixing of that value on such item.
Plaintiff stresses the fact that the company itself received the proceeds of the $2,000,000 of bonds and itself expended such proceeds in acquiring the land and erecting the piers and warehouses and other terminal facilities, and contends that it necessarily follows that the only possible asset which the company can be regarded as having received for the $3,000,000 of stock is the services of Mr. Bush for about two or three years. I think that is too narrow a view. Bush Company, Ltd., was an existing company which unquestionably had a good will of some value. Mr. Bush controlled that company. He also had an option to purchase the nearly contiguous land above-mentioned. In 1904 Bush Terminal Company acquired the assets of Bush Company, Ltd. The result thus was that between the time of its organization in 1902 and the end of 1905 there had been assembled under the single ownership of Bush Terminal Company the existing plant and business of Bush Company, Ltd., and nearly contiguous land which Mr. Bush had permitted it to acquire at the price at which he had it under option, and additional piers and warehouses and other terminal facilities, and the whole thereof, at least so far as appears, were being profitably operated. Such profitable operation then continued for a long period of years, and consecutively, year in and year out, for a period of over twenty years the item of $3,000,000 for good will was set forth upon the company's balance sheets and reported to stockholders with the approval of successive boards of directors.
Directors obviously cannot create assets by fiat, and I do not go so far as to say that, even as against the company and in favor of directors, assets can be created by laches, acquiescence, or estoppel, but whatever may now be thought of the wisdom or business judgment displayed in valuing at $3,000,000 in 1905 what the company received for the $3,000,000 of stock, I do not think that anything has been shown respecting the history of the company from its organization in 1902 to November 22, 1928, or to May 2, 1932, which warrants a finding that during the period here in question, 1928 to 1932, there did not inhere in the assembled and established plant and facilities and going business an element of value in addition to physical assets which the directors were justified in valuing at $3,000,000.
The term "good will" is generally used as indicating that element of value which inheres in the fixed and favorable consideration of customers arising from an established and well-known and well-conducted business, and in an enterprise of this sort, enjoying no legal monopoly, and not a public utility in a legal sense, that element of value indisputably is property for which stock may be issued, and in the absence of fraud the judgment of the directors as to its value is controlling. Washburn v. National Wall-Paper Co., 2 Cir., 81 F. 17; Thoms v. Sutherland, 3 Cir., 52 F.2d 592, 597; White, Corbin Co. v. Jones, 79 App.Div. 373, 79 N.Y.S. 583; Brown v. Weeks, 195 Mich. 27, 38, 39, 161 N.W. 945; Stock Corporation Law, § 69; and see Des Moines Gas Co. v. City of Des Moines, 238 U.S. 153, 164, 165, 35 S.Ct. 811, 59 L.Ed. 1244. It also is recognized that, apart from good will in that sense, there is what in the public utility rate cases is called "going concern value", by which is meant that element of value which inheres in an assembled and established plant, doing business and earning money, over one not thus advanced, and such element of value is treated as property which must be considered in determining the base upon which the utility is entitled to earn a return (Des Moines Gas Co. v. City of Des Moines, supra; Los Angeles Gas Electric Corp. v. Railroad Commission of California, 289 U.S. 287, 313, 53 S.Ct. 637, 77 L.Ed. 1180), and I can perceive no reason why such "going concern value" should not be recognized here as well as in a utility rate case. It is merely a recognition of the fact that there is a "difference between a dead plant and a live one" (City of Omaha v. Omaha Water Co., 218 U.S. 180, 202, 30 S.Ct. 615, 620, 54 L.Ed. 991, 48 L.R.A., N.S., 1084), or between a "living organism" and "bare bones" (Los Angeles Gas Electric Corp. v. Railroad Commission of California, 289 U.S. 287, 314, 53 S.Ct. 637, 77 L.Ed. 1180), and the evidence abundantly establishes that what happened here was that an unused waterfront and adjoining uplands aggregating over 200 acres were assembled and converted into a great terminal, with piers, warehouses, lofts, railroads, and other shipping and transportation facilities, to which both industry and shipping were attracted as a result of diligent and in some instances ingenious efforts, and which enjoyed an international reputation for the excellence of the services rendered through assembled facilities and a trained personnel. I consequently hold this item allowable.
I next turn to the subject of unrealized appreciation and depreciation.
Until 1915 the company's land was carried upon its books at cost. In 1915 the land was written up to 80% of the amount at which it was then assessed for taxation, and in 1918 it was written up to the exact amount at which it was then so assessed. Those two write-ups totalled $7,211,791.72, and the result was that during the period here in question the land was carried on the books at $8,737,949.02, whereas its actual cost was $1,526,157.30. Plaintiff claims that the entire $7,211,791.72 should be eliminated because it represents merely unrealized appreciation, and dividends cannot be declared or paid on the basis of mere unrealized appreciation in fixed assets irrespective of how sound the estimate thereof may be. That obviously and concededly is another way of saying that for dividend purposes fixed assets must be computed at cost, not value, and plaintiff here plants himself upon that position, even to the point of contending that evidence of value is immaterial and not admissible. If that contention be sound, the company indisputably had a deficit at all the times here involved in an amount exceeding the dividends here in question. The importance of the question so presented, both to this case and to corporations and corporate directors in general, is thus apparent, and it is, I think, surprising that upon a question so important to and so often occurring in the realm of business there is, not only no decision which can be said to be directly in point, but, also, no discussion in text-book or law magazine which does much more than pose the question without answering it. Even in Halsbury's Laws of England, 2d Ed., Vol. 5, p. 393, note (f), published in 1932, it is stated that the question has not been decided.
It is to be emphasized at the outset that the question is not one of sound economics, or of what is sound business judgment or financial policy or of proper accounting practice, or even what the law ought to be. My views of the business acumen or financial sagacity of these directors, as well as my views as to what the legislature ought to permit or prohibit, are entirely immaterial. The question I have to decide is whether or not an existing statute has been violated. The problem is one of statutory construction.
The words of the statute, as it existed during the period here involved, are: "No stock corporation shall declare or pay any dividend which shall impair its capital or capital stock, nor while its capital or capital stock is impaired, nor shall any such corporation declare or pay any dividend or make any distribution of assets to any of its stockholders, whether upon a reduction of the number of its shares or of its capital or capital stock, unless the value of its assets remaining after the payment of such dividend, or after such distribution of assets, as the case may be, shall be at least equal to the aggregate amount of its debts and liabilities including capital or capital stock as the case may be." Stock Corporation Law, § 58, as enacted by Laws 1923, c. 787.
If the part of the statute containing the words "unless the value of its assets" etc. is to be read as relating back to the beginning of the section, the lack of merit in plaintiff's contention is apparent, for the statute would then read: "No stock corporation shall declare or pay any dividend * * * unless the value of its assets remaining after the payment of such dividend * * * shall be at least equal to the aggregate amount of its debts and liabilities including capital or capital stock as the case may be." I think there is much to be said in support of the view that that is what was intended, but nevertheless the structure of the statute is such as to make that reading grammatically impossible, and I hence prefer to base my decision upon the assumption that the controlling words of the statute are merely these: "No stock corporation shall declare or pay any dividend which shall impair its capital or capital stock, nor while its capital or capital stock is impaired."
Before one can determine whether or not capital or capital stock has been impaired, one must determine what is capital or capital stock. The words to be construed thus are words which have varied and different meanings and express radically different concepts in different connections. Capital means one thing to an economist, or, perhaps more accurately, different things to different economists, and it has still different meanings to accountants and to business men. It even means different things in different statutes. To determine its meaning in this statute it thus is essential, I think, to consider the history of the statute and what our courts have said respecting the statute's predecessors.
The earliest provisions upon the subject made it unlawful to declare dividends "excepting from the surplus profits arising from the business" or to "divide, withdraw, or in any way pay to the stockholders, or any of them, any part of the capital stock." Laws 1825, ch. 325, sec. 2; Rev. Stat. 1829, pt. 1, ch. 18, title 4, sec. 2. In the Stock Corporation Law of 1890 the phrase "surplus profits arising from the business" was changed to "surplus profits of its business" and there was added the additional phrase "nor when its capital stock is or will be impaired thereby", and the prohibition against withdrawal was changed from "any part of the capital stock" to "any part of its property and assets, so as to reduce the value thereof after deducting the amount of its debts below the amount of its capital stock." Laws 1890, ch. 564, sec. 23. The prohibiting section was headed "Liability of directors for dividends not made from surplus" — not from surplus profits — and there having been inserted a reference to impairment of capital stock there was also inserted a defining clause that capital stock shall be deemed impaired "when the value of its property and assets after deducting the amount of its debts and liabilities, shall be less than the amount of its paid up capital stock". Idem. In the Stock Corporation Law of 1892 there was a return to the phraseology of the Revised Statutes, and the heading of the prohibiting section was changed to "Liability of directors for making unauthorized dividends", and the sentence defining impairment was eliminated. Laws 1892, ch. 688, sec. 23. The same phraseology was retained in the Stock Corporation Law of 1909. Laws 1909, ch. 61, sec. 28. When stock without par value was authorized there was inserted a provision prohibiting the declaration of dividends which would reduce the amount of the stated capital. Laws 1912, ch. 351, inserting Section 20 in Stock Corporation Law of 1909; Laws 1921, ch. 694. At the time the revision of 1923 was undertaken there thus were upon the statute books two provisions upon the subject of unauthorized dividends, one which related to corporations having no-par stock and which was expressed in terms of reducing stated capital, and another which related to other corporations and which was expressed in terms of surplus profits. In the Stock Corporation Law of 1923 the heading of the prohibiting section became simply "Dividends" and as already noted, all reference to surplus or to profits or to surplus profits was omitted.
It thus appears that after using the surplus and surplus profits terminology for practically a hundred years the legislature completely abandoned it, and I think that is quite significant as indicating a conscious intent to get away from the idea of profits earned as a result of completed transactions as the sole source of dividends. I do not say that the legislature thereby changed the existing law. On the contrary, I think that the terms capital and capital stock as used in the earlier statutes had been construed by the courts in such a way that the terms surplus and surplus profits as used therein necessarily meant any accretion or accumulation over and above debts and the liability to stockholders, and that the legislature of 1923 recognized and adopted that construction and omitted any reference to surplus or surplus profits for the very reason that by some persons those words were believed to convey the idea of and to be confined to an accumulation of net earnings resulting from completed transactions and for the express purpose of so clarifying the statute as to prevent the precise claim which plaintiff now here presses. I briefly mention the cases which lead me to that conclusion.
In Williams v. Western Union Telegraph Co., 93 N.Y. 162, the court was under the necessity of construing the provisions of the Revised Statutes in connection with a claim that they prohibited a stock dividend, and it said that those provisions "were intended to prevent the division, distribution, withdrawal and reduction of the property of a corporation below the sum limited in its charter or articles of association for its capital, but not to prevent its increase above that sum" (page 187 of 93 N.Y.) and to "create a property capital for the corporation, and then to keep that intact" (page 188 of 93 N.Y.). The court also said that the term "capital stock" in the statute meant "the property of the corporation contributed by its stockholders or otherwise obtained by it, to the extent required by its charter" (page 188 of 93 N.Y.). It also said: "When its property exceeds that limit, then the excess is surplus. Such surplus belongs to the corporation and is a portion of its property, and, in a general sense, may be regarded as a portion of its capital, but in a strictly legal sense it is not a portion of its capital, and is always regarded as surplus profits" (pages 188, 189 of 93 N.Y.). It still further said that the statute "was designed to prevent dividends of property which tended to deplete the assets of the company below the sum limited in its charter as the amount of its capital stock" (page 189 of 93 N.Y.).
In Strong v. Brooklyn Crosstown R.R. Co., 93 N.Y. 426, the court, again speaking with reference to the Act of 1825 and the Revised Statutes, said that when nominal capital is reduced by proper statutory proceedings the excess of the corporation's funds or property over and above the sum of the reduced capital is surplus which can be divided among stockholders (page 434 of 93 N.Y.), that the amount which can be so divided must be ascertained by an examination into the corporation's affairs, and that "whenever, by sales of property, or by means of earnings, or otherwise, the corporation comes in possession of funds which are in excess of the reduced amount fixed as capital, it can distribute that excess without violating any law" (page 435 of 93 N.Y.).
In Roberts v. Roberts-Wicks Co., 184 N.Y. 257, 266, 77 N.E. 13, 16, 3 L.R.A., N.S., 1034, 112 Am.St.Rep. 607, 6 Ann.Cas. 213, the court said: "When the property of a corporation has accumulated in excess of its chartered capital, the excess may be regarded and dealt with as constituting a surplus of profits."
In People ex rel. Astoria Light, Heat Power Co. v. Cantor, 236 N.Y. 417, 424, 141 N.E. 901, 903, 30 A.L.R. 1458, the court made the explicit statement that: "The ordinary way of determining whether a corporation has surplus profits or not is to compute the value of all of its assets and deduct there from all of its liabilities, and thus ascertain whether the balance exceeds the amount of its shares of capital stock."
In Small v. Sullivan, 245 N.Y. 343, 350, 157 N.E. 261, the court, speaking in 1927 with reference to the statute as it existed in 1909, again said that the term "capital stock" means "the property of the corporation contributed by the stockholders or otherwise obtained to the extent required by its charter," and I think the word "extent" as there used plainly means to a value equal to the sum of the dollars specified as capital in the charter. The court there also said that the object of the statute was "to prevent a withdrawal of the property which would reduce the value of its assets below the sum limited for its capital in its charter" and that "When the property of the corporation exceeds that limit, the excess is surplus, which may be divided among the stockholders" (pages 350, 351 of 245 N.Y., page 263 of 157 N.E.).
Those statements by our highest court seem to me to make it entirely plain that the terms capital and capital stock in these statutes mean an amount, i.e. a value, of property up to the limit of the number of dollars specified as the par value of paid-up issued shares (or as the stated value of no-par shares), and that when the amount, i.e. the value, of the company's property exceeds that number of dollars the excess, whether "contributed by the stockholders or otherwise obtained" is surplus or surplus profits and may be distributed as dividends until the point is reached where such dividends "deplete the assets," i.e. the value of the assets, "below the sum," i.e. below the number of dollars, specified as the par or stated value of the paid-up issued shares. In other words, the capital or capital stock referred to in these statutes is the sum of the liability to stockholders, and any value which the corporation's property has in addition to that sum is surplus. And I cannot doubt that the words "otherwise obtained" and "accumulated," as used by the court in the cases just mentioned, include an appreciation in the value of property purchased whether realized or unrealized.
Additional support for this view is found, I think, in the fact that where corporations have made distributions to stockholders on the basis of appreciation in value such distributions have been held taxable as dividends paid. People ex rel. Wedgewood Realty Co. v. Lynch, 262 N.Y. 202, 186 N.E. 673; Id., 262 N.Y. 644, 188 N.E. 102; People ex rel. Mercantile Safe Deposit Co. v. Sohmer, 158 App.Div. 110, 143 N.Y.S. 313, affirmed 217 N.Y. 605, 111 N.E. 1097.
Several text-writers state the same view (1 Morawetz on Private Corporations, 2d Ed. 1886, §§ 435, 438; 2 Machen, Modern Law of Corporations, 1908, §§ 1314, 1318, pp. 1092-1094; 7 Thompson on Corporations, 3d Ed. 1927, § 5293; 11 Fletcher, Cyc.Corporations, Rev. Ed. 1932, §§ 5335, 5344), and in an article on "Dividends from Unrealized Capital Appreciation" in 6 New York Law Review, 155 (1928), which the plaintiff has thought worthy of citation, it is admitted that the courts of New York invariably have held that "the excess of assets over capital and other liabilities constitutes the surplus available for dividends".
In Cox v. Leahy, 209 App.Div. 313, 204 N.Y.S. 741, unrealized appreciation in land values actually was taken into account in determining whether or not dividends had been improperly paid. See page 316 of 209 App.Div., 204 N.Y.S. 741. Other cases which clearly indicate that the value of assets, not their cost, is the criterion are: Hyams v. Old Dominion Copper Mining Smelting Co., 82 N.J.Eq. 507, 513, 514, 89 A. 37, affirmed 83 N.J.Eq. 705, 92 A. 588; Siegman v. Electric Vehicle Co., C.C., 140 F. 117, 121; Cannon v. Wiscassett Mills Co., 195 N.C. 119, 141 S.E. 344; and there is also the high authority of Mr. Justice Brandeis for the statement that surplus may consist of increases resulting from a revaluation of fixed assets. Edwards v. Douglas, 269 U.S. 204, 214, 46 S.Ct. 85, 70 L.Ed. 235.
Language indicating a contrary view may be found in Hill v. International Products Co., 129 Misc. 25, 46, 220 N.Y.S. 711; Hutchinson v. Curtiss, 45 Misc. 484, 92 N.Y.S. 70; Jennery v. Olmstead, 36 Hun 536, affirmed 105 N.Y. 654, 13 N.E. 926; Kingston v. Home Life Ins. Co., 11 Del. Ch. 258, 101 A. 898; Southern California Home Builders v. Young, 45 Cal.App. 679, 188 P. 586; and Sexton v. Percival Co., 189 Iowa 586, 177 N.W. 83; and Titus v. Piggly Wiggly Corp., 2 Tenn.App. 184, takes the not wholly consistent view that there is no legal objection to revaluing fixed assets and cost is not controlling but unrealized appreciation nevertheless cannot be taken into consideration in paying dividends.
In Hill v. International Products Co., supra, and Kingston v. Home Life Ins. Co., supra, the language was clearly dicta. The Hill case was an action to rescind an agreement to purchase stock on the ground of false representations, and the defendants prevailed, and the affirmance by the Appellate Division ( 226 App.Div. 730, 233 N.Y.S. 784) was an affirmance of a judgment for the defendants. In Hutchinson v. Curtiss, supra, the language was used with reference to expected profits from executory contracts, and despite the language so used an appreciation resulting from turning barley into malt was allowed although the malt had not been sold. Jennery v. Olmstead, supra, involved not a question as to the meaning of either capital or surplus in relation to the payment of dividends, but the construction of a contract in which profits were made the basis of computation of an officer's salary. Hauben v. Morris, 255 App.Div. 35, 47, 5 N.Y.S.2d 721, upon which plaintiff lays considerable stress, seems to me to be quite far removed from the question here presented. The most that can be said of it, as it seems to me, is that the court refused to hold that directors had breached a fiduciary duty in refusing to cause the corporation to purchase its own stock when unrealized appreciation would have had to be resorted to in order to make the purchase, and in refusing to so hold the court plainly indicated a willingness to assume that such unrealized appreciation could have been used for the making of such purchase.
In summary, I think that it cannot be said that there is a single case in this State which actually decides that unrealized appreciation cannot be taken into consideration, or, stated in different words, that cost and not value must be used in determining whether or not there exists a surplus out of which dividends can be paid. I think, further, that such a holding would run directly counter to the meaning of the terms capital and capital stock as fixed by decisions of the Court of Appeals construing the earlier statutes, and that such construction of those terms must be deemed to have been adopted by the legislature in enacting the statute here involved. See Matter of Scheftel's Estate, 275 N.Y. 135, 141, 9 N.E.2d 809. I thus obviously cannot follow decisions to the contrary in other States or any contrary views of economists or accountants. If the policy of the law be bad it is for the legislature to change it.
Throughout the period in question the company carried upon its books as assets its investments in and advances to its subsidiaries at their face value, i.e. at the cost thereof, and despite his insistence that unrealized appreciation of one asset cannot be taken into consideration, the plaintiff yet insists that these investments and advances must be written down to the value thereof as shown by the books of the subsidiaries, even though the subsidiaries are still carrying on business, and, further, that those books shall be what he calls "properly adjusted", so as to cause them to show the actual value of the stock of and claims against those subsidiaries. He thus, as it seems to me, takes the inconsistent position that while unrealized appreciation cannot be considered, unrealized depreciation nevertheless must be. Defendants, also, take the equally inconsistent position that while unrealized appreciation must be considered, unrealized depreciation need not be. I am of the opinion that the same reasons which show that unrealized appreciation must be considered are equally cogent in showing that unrealized depreciation likewise must be considered. In other words, the test being whether or not the value of the assets exceeds the debts and the liability to stockholders, all assets must be taken at their actual value.
I see no cause for alarm over the fact that this view requires directors to make a determination of the value of the assets at each dividend declaration. On the contrary, I think that is exactly what the law always has contemplated that directors should do. That does not mean that the books themselves necessarily must be altered by write-ups or write-downs at each dividend period, or that formal appraisals must be obtained from professional appraisers or even made by the directors themselves. That is obviously impossible in the case of corporations of any considerable size. But it is not impossible nor unfeasible for directors to consider whether the cost of assets continues over a long period of years to reflect their fair value, and the law does require that directors should really direct in the very important matter of really determining at each dividend declaration whether or not the value of the assets is such as to justify a dividend, rather than do what one director here testified that he did, viz. "accept the company's figures." The directors are the ones who should determine the figures by carefully considering values, and it was for the very purpose of compelling them to perform that duty that the statute imposes upon them a personal responsibility for declaring and paying dividends when the value of the assets is not sufficient to justify them. What directors must do is to exercise an informed judgment of their own, and the amount of information which they should obtain, and the sources from which they should obtain it, will of course depend upon the circumstances of each particular case. What is said in Bourne v. Bourne, 240 N.Y. 172, 148 N.E. 180, with respect to courts reviewing the discretion and judgment of directors was not said with reference to the legality of the declaration of a dividend, and, furthermore, the statements there made are predicated upon the assumption that directors realize that they are under a duty to exercise an informed judgment with respect to the assets of the company of which they are directors and have performed that duty. If directors have blindly or complacently accepted either cost or any other arbitrary figures as indicative of value, they have not exercised either discretion or judgment and no court is required to act as if they had. When directors have in fact exercised an informed judgment with respect to the value of the company's assets, the courts obviously will be exceedingly slow to override that judgment, and clear and convincing evidence will be required to justify a finding that such judgment was not in accordance with the facts. In the last analysis, however, the issue, in any case in which it is claimed that dividends have been paid out of capital, is the value of the assets and the amount of the liabilities to creditors and stockholders at the times the dividends were declared and paid.
Upon the evidence in this case I find that the directors here did in fact exercise an informed judgment with respect to the value of the good will, the value of the land of the company, and the value of the improvements thereon, and also with respect to the value of the land and improvements thereon which were owned by the subsidiaries, Bush Terminal Buildings Company and Bush Terminal Railroad Company, and that they believed and determined that the good will was worth $3,000,000 and that such land and improvements were worth several millions of dollars more than the amounts at which they were carried on the books. At least one of the directors was thoroughly versed in real estate values by reason of long and extensive experience in buying and selling and in recommending mortgage loans on real estate and was personally and thoroughly familiar with the properties and business of all the companies just named, and of the development thereof, from the time of the organization of the company, and no one could criticise any other director for relying upon his knowledge and judgment as to the value thereof, or for basing a judgment thereon. His knowledge and judgment probably were as safe and sound a guide as any formal appraisal that could have been obtained. At least one other of the directors likewise had a thorough familiarity with these properties and business from the inception of their developments.
I find that there was not the same exercise of informed judgment with respect to the value of the investments in and advances to subsidiaries. To a very large extent the value of the investments in and advances to Bush Terminal Buildings Company and Bush Terminal Railroad Company were affected by the value of the land and improvements owned by those companies, as to which I have just found that there was an exercise of an informed judgment; but on the whole I find that the directors accepted the cost of the investments in and advances to all the subsidiaries, as the same were recorded upon the books, without in fact considering the extent to which such recorded costs reflected their true values at the times of the declaration and payment of the dividends here in controversy.
The amounts which the plaintiff claims should be deducted from the book figures in order to reduce those investments and advances to actual values and eliminate demolished properties are $3,131,012.24 in 1927, $3,277,907.52 in 1928, $3,426,273.22 in 1929, $3,570,303.66 in 1930, $3,786,299.23 in 1931, and $3,888,062.53 in 1932 to April 30, 1932, the details there being shown upon Exhibit 78. I find it unnecessary to determine to what precise extent the deductions claimed should be made, because I find ample evidence to sustain and justify the judgment of the directors that the value of the land and improvements exceeded the sum at which they were carried on the books by an amount sufficient to show a surplus greater than the amount of the dividends even if all the deductions so claimed by the plaintiff were allowed in full. I may state, however, that comparison of Exhibits 50 and 165 shows that plaintiff's own witnesses assign to the investments in and advances to the subsidiaries the following values as compared with the following amounts at which they were carried on the books: 1927, $4,716,838.72 as compared with $5,475,135.35; 1928, $6,304,529.67 as compared with $5,720,816.68; 1929, $6,935,331.52 as compared with $6,028,188.73; 1930, $5,776,506.49 as compared with $6,760,186.21; 1931, $5,530,285.42 as compared with $7,030,988.77; 1932, $5,581,932.34 as compared with $7,144,984.76. It thus is obvious that upon the basis of the testimony of plaintiff's own witnesses no deductions should be made in connection with those items in 1928 or 1929, and that the deductions should be less than $770,000 in 1927, less than $1,000,000 in 1930, and about $1,500,000 in 1931 and 1932.
Now turning to the land, the land which was carried on the books throughout the period in question at $8,737,949.02 was assessed for taxation at $11,863,000 in each of the years 1927 to 1932, and buildings which were carried on the books at $8,183,945.61 in 1927, $8,415,024 in 1928, $8,449,253.54 in 1929, $8,423,116.40 in 1930, and $8,395,108.40 in 1931, were assessed at $9,413,500 in 1927, $9,471,500 in 1928, $10,488,500 in 1929 and $10,497,000 in 1930 and 1931. Tax assessments in this City and other cities of this State repeatedly have been recognized as competent evidence upon the question of value (Heiman v. Bishop, 272 N.Y. 83, 88, 4 N.E.2d 944; Matter of Board of Water Supply of City of New York, 277 N.Y. 452, 458, 14 N.E.2d 789; Hoard v. Luther, 251 App.Div. 692, 694, 297 N.Y.S. 718; Berkshire Life Ins. Co. of Pittsfield, Mass., v. Van Voorhis, 245 App.Div. 592, 283 N.Y.S. 95; President and Directors of Manhattan Co. v. Premier Bldg. Corp., 247 App.Div. 297, 285 N.Y.S. 806; Matter of Simmons, 132 App.Div. 574, 576, 116 N.Y.S. 952, and I think it not uncommon for business men to act upon them, within reasonable limits, as a rough and ready indication of value.
With respect to these particular assessments the company instituted certiorari proceedings, and in its petitions and supporting affidavits it claimed that the assessments should be reduced far below the amount at which the properties were carried on its books. Those certiorari proceedings were pending unheard and undetermined when plaintiff was appointed receiver in April 1933. He and his then co-receiver, who afterwards were appointed as trustees, then entered into a compromise with the City of New York in 1934 in pursuance of which the total assessments for land and improvements were fixed at $18,894,225 for 1927, $18,952,250 for 1928, $19,784,250 for 1929, $19,792,750 for 1930 and 1931, and $19,793,750 for 1932. If the amounts requested in the company's certiorari proceedings be accepted as showing true values and plaintiff's other claims be allowed, deficits exceeding the amount of the dividends result (Exhibit 131). If the amounts fixed pursuant to the plaintiff's compromise be accepted as showing true values, and plaintiff's other claims be allowed, surpluses exceeding the amount of the dividends result (Exhibit BB). Each party thus in turn urges an acceptance of the other set of figures. Plaintiff says his compromise did not represent his judgment of values, or the judgment of any appraiser engaged by him, but merely the best compromise he could get from the City authorities. Defendant directors likewise say that the company's certiorari petitions did not represent their judgment of values but merely their effort to decrease the company's taxes, and the attitude of all perhaps is fairly reflected in the statement of one of them that it is the duty of directors to save taxes if they can and certiorari proceedings long have been a game in which everyone asks a reduction to the lowest point which one can hire an appraiser to swear to. I unhesitatingly and reservedly accept the plaintiff's explanation. He is not an expert in real estate valuation and was performing a plain duty. He has asked and has been accorded commendation, not criticism, for compromising instead of going to trial. That very circumstance, however, of itself imports a rather general recognition of the fact that a trial would not have resulted in a fixing of values at very much, if any, below the compromise figure, and I think that, at least in the absence of some extraordinary circumstance not here appearing, the figures at which the City and the taxpayer have agreed to compromise existing controversies with respect to the amount at which property should be assessed for taxation, fairly and justly may be taken as indicating the fair value of such property, and I here so find. Such figures are here also fully sustained by the testimony of a competent appraiser who here testified for defendants. It is also worthy of note that an engineering expert engaged by plaintiff to fix a value upon the properties and business as a whole accepted assessed valuations of land as at least one basis for his conclusions, and that no real estate appraiser has here attempted to fix a value of the land at lesser figures.
Each side has submitted an elaborate and detailed appraisal by an engineering appraiser of high repute. Each such appraiser has undertaken to find reproduction cost and also to arrive at a valuation by the method of capitalizing earnings, or a valuation supported by income, as it is expressed by one of them. Their views as to reproduction cost are not widely divergent despite the fact that they arrive at their conclusions upon that point by quite different methods, and under the view of either the surplus, i.e. the excess of asset value over liabilities to creditors and stockholders, at all times here in question, was substantially greater than the dividends paid. It is only when they come to arrive at a valuation by the method of capitalizing earnings that the views of these appraisers assume sharp contrast. According to defendants' appraiser the earnings support a value not greatly different from what he finds to be the reproduction cost less depreciation. According to plaintiff's appraiser the earnings fail to support a value equal to the liabilities to creditors and stockholders. To point out the differences in detail would unduly expand this opinion, already disappointingly lengthy. It is sufficient, I think, to say that I find that plaintiff's appraiser (1) has made unjustified deductions in computing the net income before depreciation, (2) has deducted excessive amounts for repairs and maintenance and depreciation, and (3) has been unjustifiably conservative in capitalizing his assumed net earnings at too high a rate, or, in other words, in assuming that no one would be willing to invest in expectation of a lower rate of return than he has fixed. Comparatively slight differences in the assumptions made upon these three points (and it is to be emphasized that they are all merely assumptions and opinions) make an enormous difference in the result, and while I hold that directors may not impair capital and then free themselves from the resulting liability by saying that they did it in good faith, evidence more cogent than that which has been supplied is necessary to produce a conviction that a willing buyer and a willing seller would not have agreed upon a much higher price than is indicated by this particular appraiser's assumptions. Plaintiff submitted, also, another valuation by another appraiser based entirely upon a capitalization of earnings and reaching a valuation far below the valuation arrived at by plaintiff's expert already mentioned. I think it entitled to no weight whatever. Its fundamental postulates are, first, that no real estate ever is worth what it costs, and, second, that no one would buy a going business having large real estate holdings among its fixed assets except on the basis of being assured of a net return of ten per cent upon the investment. I conclude that the earnings support a value substantially as found by defendants' engineering appraiser.
It actually is unnecessary to go that far. Taking the land and improvements at the values fixed as a result of plaintiff's own compromise with the City's taxing authorities, taking the investments in and advances to subsidiaries at the values fixed by plaintiff's own witnesses as the same are tabulated on Exhibit 165, taking the good will at $3,000,000 and taking the other items of assets which have not been questioned at the values at which they appear on Exhibit 50 (each of which things I find it proper to do) gives a total of assets far in excess of all liabilities to creditors and stockholders.
In summary, therefore, after considering all the evidence, I find that at the times these dividends were declared and paid the value of the assets exceeded the total liabilities to creditors and stockholders by an amount in excess of the total dividends, and that there accordingly was no impairment of capital or capital stock.
The conclusion thus reached makes it unnecessary to consider the question whether directors not present when a dividend is declared may be held liable because of presence at a subsequent meeting at which the prior declaration may be said to have been ratified, or any of the other defenses pleaded by defendants.
Defendants' motions for judgment at the close of the whole case are granted, and I direct the entry of judgment for defendants, with separate bills of costs to those appearing by separate attorneys.