CORPORATION LAW | B2015

CASE DIGESTS
BERKS BROADCASTING CO.
v. CRAUMER, et al.
May 7, 1947
Sterns, J
Luciano, Noel Christian O.
SUMMARY: Defendants in this case were incorporators and directors of
Berks Broadcasting who declared and paid out dividends in 1944 for a
total amount of $13,000. hese dividends were declared on the !asis of
earning of the compan" during, which, together with the #$$%&%D
surplus at the end of 1943, made a surplus in earnings of $14,'((.)*. he
e+istence of the surplus of assets depended on the inclusion in the assets
of the ,write-ups. of $*/,000 which still remained in the !alance sheet. 0f
the ,write-ups. account was eliminated, there is 12 3456$43, !ut a
deficienc" of $*3,4(4.0/. hese ,write-ups. represented ,increases in the
valuations of fi+ed assets of the compan".. he new directors of the
corporation sought to recover the dividends paid alleging that it was paid
out unlawfull" since there reall" was no surplus. he 37 agreed and held
the defendants lia!le to return the dividends paid. he write-ups of
$*/,000 represented an unreali8ed appreciation in the value of the
compan"9s fi+ed assets hus, their inclusion in determining the e+istence
of a surplus from which dividends might !e declared was 41$#:;4$
DOCTRINE: 7apital of a corporation must not !e impaired in an"
manner, e+cept, of course, as such an impairment ma" involuntar" occur
through losses resulting from the operation of compan"9s !usiness. 0t is
illegal to declare and pa" dividends from other than a surplus consisting of
an e+cess in value of assets over the aggregate of the lia!ilities and the
issued capital stock.
5eason !ehind prohi!ition< =1> o afford a margin of protection
for creditors in view of the limited lia!ilit" of the shareholders, and also
=*> o protect the interest of the shareholders themselves !" preserving
the capital so that the purposes of which the corporation was formed ma"
!e carried out.
he difficult" lies in the computation of the surplus from which
dividends ma" properl" !e declared and paid. 0n this regard, one rule has
!een generall" declared and paid< 3uch a surplus must !e a !ona fide and
not an artificial or fictitious one. 0t must !e founded upon #74#$
earnings or profits and not dependent for its e+istence upon a theoretical
estimate of an appreciation in the value of the assets.
FACTS: he defendants =7raumer and * other unnamed persons> and
$andis incorporated and organi8ed Berks Broadcasting 7ompan" for the
purpose of constructing and operating a radio !roadcasting station.
#uthori8ed capital stock was $100,000 consisting of 1,000 shares,
each with $100 par value. 3tock was issued to the 4 incorporators and the"
!ecame the stockholders of the 7ompan".
#ccording to the !ooks, the stock was full" paid for !" the receipt
from each of the shareholders of $(,000 and !" the fi+ing of a value of
$'0,000 upon an asset named ,;ranchise and 6romotion %+pense.. # "ear
later, the latter item was written off and in its place were su!stantiated
entries of<
1. $(0,000 as amount for ,Due on 4npaid 3tock 3u!scriptions. and
*. # total of $30,000 consisting of ,write-ups. or increases in the
valuations of fi+ed assets of the compan"
#s to the $(0,000 4npaid 3u!scriptions, each stockholder paid $4,*00,
thus reducing that item to $33,*00. # "ear later, it was cancelled and in lieu
thereof an item in the same amount was entered as an asset designated as
,&ood :ill and 6romotion %+pense..
his was reduced to $*0,000 * "ears later and $4,000 was eliminated
from the ,write-ups. =item * a!ove>.
#s of Decem!er 1943, !alance sheet of the compan" showed assets in
e+cess of lia!ilities and the issued capital stock of $*,(4(.94.
NOTE HOWEVER that the s!"ls #$ assets %e"e&%e% #& the
'&(ls'#& '& the assets #$ the )*!'te+"s, #$ -./,000 *h'(h st'll
!e1a'&e% '& the 2ala&(e sheet. I$ the )*!'te+"s, a((#&t *as
el'1'&ate%, the!e 's NO SUR34US, 2t a %e$'('e&(5 #$ -.6,787.0/.
0n #pril 1944, the defendants declared and paid a dividend of $4,000.
0n ?une 1944, the 4 shareholders entered into an agreement for the sale
of their stock to certain parties for $*10,000, su!@ect to approval of the
;ederal 7ommunications 7ommission.
CORPORATION LAW | B2015
CASE DIGESTS
6ending approval from the 7ommission, the defendants, as directors,
declared and paid further dividends in ?ul", 2cto!er, and Decem!er. #ll
totaling $13,000 in dividends paid.
hese dividends were declared on the !asis of earning of the compan"
during, which, together with the #$$%&%D surplus at the end of 1943,
made a surplus in earnings of $14,'((.)*.
Berks Broadcasting, now under a new set of directors, !rought the
present action to recover for its treasur" the $13,000 which the defendants
had allegedl" unlawfull" declared and paid out as dividends.
ISSUE< :21 the defendants unlawfull" declared and paid out dividends,
there!" giving the 7orporation the right to recover the same.
HE4D<
0. Basic 6rinciple in 7orporation $aw< 7apital of a corporation must
not !e impaired in an" manner, e+cept, of course, as such an
impairment ma" involuntar" occur through losses resulting from
the operation of compan"9s !usiness
#. 0t is illegal to declare and pa" dividends from other than a
surplus consisting of an e+cess in value of assets over the
aggregate of the lia!ilities and the issued capital stock
1. 5eason !ehind prohi!ition<
a. o afford a margin of protection for creditors in view
of the limited lia!ilit" of the shareholders, and also
!. o protect the interest of the shareholders themselves
!" preserving the capital so that the purposes of
which the corporation was formed ma" !e carried out
B. But the difficult" lies in the computation of the surplus from
which dividends ma" properl" !e declared and paid
1. 0n this regard, one rule has !een generall" declared and
paid< 3uch a surplus must !e a !ona fide and not an
artificial or fictitious one
a. 0t must !e founded upon #74#$ earnings or
profits and not dependent for its e+istence upon a
theoretical estimate of an appreciation in the value of
the assets
*. he same rule is also found in the 7orporation #ct of
1')4 =43>
00. 7$%#5$A, in this case, the write-ups of $*/,000 represented an
unreali8ed appreciation in the value of the compan"9s fi+ed assets
#. hus, their inclusion in determining the e+istence of a surplus
from which dividends might !e declared was 41$#:;4$
B. 2nce eliminated, there would !e no surplus, !ut a revealed
deficienc" in capital
1. 0t would thus follow that the corporation is now entitled to
recover from the defendants the amount improperl"
distri!uted !" them as dividends
DIS3OSITIVE< 5ecords remanded to enter @udgment in favor of the
compan" and against defendants.