
    INFORMAL DIVISION OF PROFITS TREATED AS A DIVIDEND.
    Court of Common Pleas of Montgomery County.
    Joseph Kramer v. The Kramer Brothers Foundry Co. et al.
    Decided, December 18, 1918.
    
      Corporations—Acquiescence of Stockholders in Informal Acts of the Directors Cures the Irregularity—Division of Profits to the Disadvantage of Certain Stockholders—Equivalent to Declaration of Dividend in which an Omitted Stockholder is Entitled to Participate— Corporation Estopped from Setting up Inequality of Division as a Defense to its Treatment as a Dividend—Customary Method of Transacting Corporate Business Binding.
    
    1. A division of the profits of a corporation, informally agreed upon by the two chief stockholders owning practically all of the stock, will be construed as a declaration of a dividend.
    2. Such a division of profits, acted upon by one of the stockholders to the disadvantage of the others, will be deemed a dividend, notwithstanding the fact that none of the statutory formalities surrounding the declaration of a dividend have been complied with.
    3. The fact that there was no formal action by the directors and no setting aside of a specific amount or the declaration of a specified per cent., will not prevent such division of profits from being treated as a dividend.
    4. Unanimous consent and acquiescence of the stockholders, acted on by the parties concerned to such an extent as to materially change their position, precludes the assenting stockholders as individuals and the corporation as such, from afterwards setting up legal in-formalities in matters of internal concern, affecting only the interests of the stockholders, to the overthrow of rights that have been acquired on the faith of the consent and acquiescence.
    5. Where two directors of a corporation with the consent and ecquiescence of the remaining directors and stockholders, make a division of the profits of a corporation other than pro rata, and such unequal division is acquiesced in by the remaining stockholders, the-corporation will be estopped from setting up the inequality or failure to divide pro rata as a defense to the payment of such dividend.
    
      
      A. W. Schulman and Mattern & Brumbaugh for plaintiff.
    
      Murphy, Ellif <& Leen, for defendant.
   Martin, J.

This cause comes before the court upon a motion filed by the defendants for a new trial and to set aside the verdict of the jury and for judgment on the special verdict returned by the jury. This case is an action brought by the plaintiff against the defendant-to recover a dividend informally declared and paid to the defendant with the understanding that the plaintiff was to permit his dividend to remain with the funds of the company until such time as he saw fit to withdraw it. The petition avers:

‘ ‘ That for many years and at the time of the occurence of the matters herein set forth, the plaintiff and defendant, George Kramer, were the controlling stockholders and owners of said company; that owing to its close organization said company never formally declared dividends, but permitted its surplus earnings to accumulate, part of same being invested in building association stock, part re-invested in the business of the corporation and part invested in real estate in a subsidiary company known as the Kramer Brothers Realty Company.- That in July, 1907, the defendant corporation had on hand and was possessed of a large surplus of undivided profits; that at said time the following agreement was entered into by and between the plaintiff and the defendant, George Kramer, and the other minor stockholders of the company as individuals and as officers of th¿ corporation.
“That said company was to pay to George Kramer as his share of the undivided surplus profits and as a dividend on his stock the sum of eight thousand one hundred and sixty-five dollars- and sixty-five cents ($8,165.65) for the purpose of building a home for himself and that the company did then and-there and at such time pay to the said George Kramer the said amount and this plaintiff- being the owner of 420 shares of stock, was to receive the same amount of stock as a dividend upon his stock, but that by reason of the fact that plaintiff had no need for such sum at said time, it was agreed between the said parties as individuals and- the officers and directors of the corporation that the plain.tiff was to receive said amount, but he was to allow his said dividend to remain, with, the funds; of the company until such time as he would require it for building a home for himself, 'etc,”

The petition further avers that the defendant in 1912, made a demand for this dividend which was refused; that thereafter the plaintiff sold his stock in the corporation to the defendant, George Kramer, and after the sale brought suit for the amount of this dividend which he claims to be owing to him.

The defendant answered and admitted that George Kramer withdrew a sum approximating the sum of eight thousand dollars ($8,000.00) for the purpose of building a home, and denies all the other allegations of the petition.

The .defendant further alleged that the withdrawals of the company’s funds made by the plaintiff and the defendant, George Kramer, about equalized each other. The defendant further alleged that the settlement between George Kramer and Joseph Kramer on the 16th day of October, 1914, also included a settlement of the claim of Joseph Kramer against the Kramer Brothers Foundry Company, which was the subject of this action, and that in accepting fifty-five thousand dollars ($55,000) for his stock, that Joseph Kramer agreed to and intended to cancel this claim.

The ease was tried to a jury and the defendant submitted the following form of special verdict, which was submitted to the jury, which special verdict with the answer of the jury is as follows:

“Question One (1). a. Was there any formal action of the Board of Directors of the defendant corporation at the meeting of July 7th, 1907, whereby permission was granted George Kratoer to withdraw surplus funds of the corporation?
“Answer. No.
“b. Was any record of such meeting made, signed by the officers of the corporation?
“Answer. No.
“Question Two (2). State whether there was anv formal action of or consent by, the board of directors of the defendant corporation, at the meeting of July 7th, 1907, or at any meeting thereafter, whereby any provision was made to pay all the other stockholders (outside of George Kramer and Joseph Kramer) sums of money out of the surplus of the corporation, proportionately to their various stockholdings in the corporation, so that they were to receive such an amount proportionate to their stock-holdings as would equalize them with George Kramer on his withdrawal of $8,165.65.
“Answer. No.
“'Question Three (3). State whether the sum of money sued for in this case was ex^er separated from the general funds of the corporation that is, set aside or set apart from the same?
•. “Answer. No.
“Question Four (4).- State xvhether the boobs of the corporation show or eA'er did show, the amount of money sued for in this case or any part thereof credited to the name of Joseph Kramer, and whether any Avriting or note xvas ever given by the corporation, that is, set aside or set apart from the same ? - thereof 'as a debt.
“Answer. No.
“Question Five (5). Was there any credit eAer made on the boobs of the corporation to the names of any stockholders of the corporation xvith amounts, to equalize the amount George Kramer drew, proportionately to their various respective stockholdings ? ...
“Answer. No.
“G. M. Laxvder, Foreman-.”

The jury has returned a verdict, for $8,165.65 plus interest in faxor of the plaintiff. They have also- found a special verdict in the way of ansxvers to a number of interrogatories framed by defendant’s counsel. After the verdict and the special vei’dict coxxnsel for defendant filed a motion asking for a judgment ixx their favor, notxvithstanding the general verdict for the plaintiff, for the following reasons:

1. Because the special finding of facts made by the jury is inconsistent with said general verdict.

2. Because upon the statements in the pleadings defendants are entitled by law to judgment in their favor.

The special verdict in the case consists of answers give.n to five questions framed by counsel for defendants. The question raised by these five questions and the pleadings in this case is whether or not there was a dividend declared, as shown by the pleadings axxd the special verdict. There is no question but what the plaintiff is entitled to a judgment upon the general verdict; .unless the general verdict, is manifestly against the weight of the evidence. If there was no dividend declared by the defendant company under the law and in accordance with the principles of equity as. shown by the pleadings and the. special verdict, then the defendant would be entitled to a judgment.

The plaintiff in his petition has set forth that no formal action was taken in the declaration of this alleged dividend and that the company never did formally declare dividends. So that subdivision A, under question 1, in the special verdict, which reads as follows: “Was there any formal action of the board of directors, of the defendant corporation at the meeting of July 7, 1907, whereby permission was granted George Kramer to withdraw surplus funds of the corporation?” to which the jury answered “No,” is not inconsistent with the pleadings, and I do not believe that the defendants’ counsel now will contend is so contrary to the law and the principles of equity as to preclude the plaintiff from securing judgment on account of that part of the special verdict alone. Neither does the court believe that counsel for defendants seriously contend that the ’answer “No” given by the jury in that part of the ■special verdict in answer to subdivision B of question 1, -which réads as follows: “Was any record of such meeting made, signed by the officers of the corporation?” should preclude the plaintiff from a judgment in this case on a general verdict.

The court makes this statement because counsel for defendant in their brief have virtually admitted that under certain conditions a dividend informally made by the board of directors would be good, and as the court understands their claim, that such a dividend would be good in law under the state of facts disclosed by question No. 1 alone.

We will pass, therefore, to question No. 2 under the special verdict, which reads as follows: “State whether there was any formal action, or consent, by the board of directors’ of the defendant corporation at the meeting of July 7th, 1907, or at any time thereafter whereby any provision was made to pay all 'the other stockholders outside of George Kramer and Joseph ¡Kramer sums of money, out of the surplus of. the corporation proportionally to their various stockholdings in the corporation, so that they were to receive such an amount proportionate to their stockholdings as would equalize them with George Kramer on his withdrawal of $8,165.65?” To which interrogatory the jury answered “No.”

It requires no discussion or argument to show that the first part of this interrogatory, to-wit, “State whether or not there was any formal action of the board of directors,” etc. “at the meeting of July 7th,” etc., should not affect the general verdict, because it has been admitted in the petition, answer and reply, and in the testimony that there was not any formal action by the board of directors on July 7th, 1907, or at any meeting thereafter, and under the evidence there was no formal meeting at all of the board of directors or stockholders until some time in 1912. And as the court understands the claim of counsel for defendants, the fact that there was not any formal action would not in itself preclude plaintiff from a judgment on his verdict.

But coming on to the remaining portion of question No. 2, in which the interrogatory, by dropping the words “any formal action of” might be changed so as to read as follows: “State whether there was any consent by the board of directors of the defendant corporation at the meeting of July 7th, 1907, or at any time thereafter whereby any provision was made to pay to all the stockholders outside of George Kramer and Joseph Kramer sums of money out of the surplus of the corporation proportionately to their various stockholdings in the corporation, so that they were to receive such an amount proportionate to their stockholdings as would equalize them with George Kramer on his withdrawal of $8,165.65,” becomes a more serious matter. It becomes a more serious matter because, on account of the informality of the proceedings, under which it is claimed this dividend was declared, if the consent of all the stockholders and board of directors was not secured, that fact would or might be fatal to plaintiff’s cause.

But let us inquire whether or not question No. 2 is stated in such form that the jury might know, by the exercise of ordinary intelligence, what the answer should be under. the evidence. In the first place, there might be two. answers to the question, of “Was there any formal action,” because the pleadings as well as the evidence shows there was not; there could be no other answer than “No.” While to the interrogatory, “Was there any consent,” etc., the answer might be “Yes.”

'So the jury in its answer.under that state of facts should answer “No” as to formal action, and “Yes” as to consent. The jury might very easily have construed this question to mean that the word “formal” should modify the word “action,” and also the word “consent.” If the question is so construed, the only answer could be “No,” and only one answer would be needed.

. The court does not care to make any frivolous discrimination but the pleadings do not show that this alleged agreement between George and Joe Kramer took place on July 7, or at any time thereafter. So far. as the court-knows, and there is evidence tending to establish that fact, this supposed agreement was entered into before July 7th, 1907, and in that ease the jury could have consistently answered “No” and might have further amplified its answer by saying that the consent was given before July 7th, 1907.

But there is another reason why the jury in its answer might have given the answer “No,” which would have been perfectly consistent with the true meaning of this question, double-barreled as it was, because the question reads as follows: ‘ ‘ State whether there was any formal- action of or consent by the board of directors of the defendant corporation at the meeting of July 7th, 1907, or at any meeting thereafter?” So that this question is modified by the phrase “at the meeting of July 7th, or at any time thereafter of the hoard of directors.”

Now, the pleading does not state that this agreement was entered into at a meeting iof the hoard of directors, and the evidence does not show that it was entered into at a meeting of the board of directors, either on July 7th, or at any meeting thereafter of said board. The fact is the evidence shows that what was done did not occur at a meeting of the board of directors, on this or any other matter. The evidence as the court remembers it does not show that there was any meeting of the board of directors as a board of directors, until some time in 1912. There might have been a consent by each member of the board of directors and the stockholders given separately or individually or informally, without having been given at a meeting of the board of directors as a board. So that the jury could have consistently given the answer “No,” to this question without having been inconsistent with the averments in the petition, or with the general verdict. If the question had been asked, “State whether there was any consent given by the members of the board individually, or by the stockholders individually, or in any manner, to pay all other stockholders,” etc., the answer “No’ might have been fatal to plaintiff’s cause.

So that the answer “no” to question No. 2 on account of the way the question was framed is not conclusive in the mind of the court, even on the theory of the ease which the defendants advocate.

In the case of Davis v. Turner, 69 O. S., 101, in the latter part of the third syllabus, we find the following language:

“To justify the court in setting aside or disregarding the general verdict on the ground that it is inconsistent with such special finding, the conflict must be clear and irreconcilable.”

As the court has construed it there is no real conflict between the pleadings and the answer to this question; neither is there a conflict between this part of the special verdict and the general verdict. But if there be a conflict, the c'ourt holds that the conflict is not clear and irreconcilable with the general verdict under the law.

Thompson on Corporations, Second Edition, in the second volume, in Section 1074, under the, head of “Directors Acting Individually,” and not at a meeting, says:

“The rule that a board of directors must act as a body or unit is not iron-clad. It has already been seen that a by-law may be created by custom or usage. For similar reasons a board of directors may by acting separately in an individual capacity establish a custom or usage that will be binding upon them and upon the corporation. Thus where it appeared that from a long number of years by a customary usage corporate business was transacted by securing the separate consent of the directors, or that the business was customarily transacted at either a casual or informal meeting of the board, it was held as a matter of law to constitute sufficient approval in the absence of any law or by-laws restricting the directors to a different mode.”

In the ease of Bank v. Sanford Fork, etc., Company, on page 10 of the 157 Ind. Report, it was held that the directors acting separately could authorize -the president to execute mortgages and other corporate instruments.

In the case of Jordan v. Collins, 107 Ala., 572, where the directors themselves owned all of the stock of the corporation and authorized the president to sell all the assets, it was held that it was immaterial that such authority was not given at the regular meeting of the directors.

In the 43 N. H. Rep., page 343, it was held prima- facie sufficient proof for a stranger, of the concurrence of the directors of a corporation, to show that they assented separately.

In the 30 Yt. Rep., in the case of Bank of Middlebury v. Rutland & Washington R. R. Co. et al, the last syllabus reads as follows:

“It is not necessary that authority from a corporation to its agents to contract in its behalf, either under seal or otherwise, be conferred at an assembly of the directors unless that is their usual practice.”

If the directors have adopted the practice of giving a separate assent to the execution of contracts in their name by their agents, it is of the same force as if done by a vote at a regular meeting of the board.

In Yol. 94 of the Texas Reports in the case of The Harper Company v. Manning, in the first syllabus we read as follows:

“The consent of all the stockholders of a corporation to the conveyance of its land by the president as a donation to a public improvement estopped them from claiming such land as distributees of the assets of the corporation on its dissolution, though the conveyance was not authorized by any vote of its directors or stockholders.”

In this case even land belonging to a corporation was donated, without consideration, to a public improvement by the consent of the stockholders alone, and not by any vote of either its directors or stockholders.

It is almost unnecessary in connection with those authorities to mention the case of Groh’s Sons v. Groh, reported at page 85 in the 80 Appellate Division Reports of the Supreme Court of New York, in which the business of the corporation was conducted without the formality of holding directors’ meetings or evidencing any pact of the corporation by written minutes.

The third question of the special verdict reads as follows: “State whether the sum of money sued for in this case was ever separated from the general funds of the -corporation—that is, set apart or laid aside from the same?” To this question the jury answered “No.”

The court does not know what the jury construed this question to mean. As the court understands this question, it means to ask whether there was an absolute physical separation of the amount claimed by Joseph Kramer from the general funds of the corporation. That is, that this amount of money, for instance, should have been deposited in a bank other than the bank in which the corporation had its general funds. Placing this construction upon this question, the court can not see how the answer “No” given by the jury conflicts with the general verdict, or why this answer to this question would deprive the plaintiff of the right to a judgment under the general verdict.

The court does not understand the law requires after a dividend has been declared, that it must be physically seggregated from the -general funds of the corporation, in order to make the corporation liable to a stockholder entitled to a dividend. As the court understands the law, when under the rules of law and equity a stockholder is entitled to a part of a dividend, the corporation is indebted to that stockholder for that part without physical segregation. If the stockholder permits his part of the dividend to remain with the general funds of the corporation, he runs the risk of being'considered only as a general creditor in case the corporation fails in business, and must pro rate with other general creditors on his dividend. So that in the end the corporation is indebted to him at least.

In the 7th Edition of Cook on Corporations, Vol. 2, in the latter part of Section 542, we read as follows:

“And where no specific fund has been set aside, a stockholder not having claimed or received his dividend, has, upon an insolvency of the corporation merely a claim of debt against the corporation, and must come in and fare as the other creditors do. ”

The title to this section reads as follows: “A dividend declared and specifically set apart as a distinct fund belongs absolutely to the stockholders,” and throughout this whole section there is no other claim made outside of the fact that when it is physically segregated, it then becomes the absolute property of the stockholder.

There is no statement in this section that unless it be physically segregated the company is not indebted to the stockholder for his part of the dividend. In Section 5322, in the 5th Volume of second edition of Thompson on Corporations, we read: “After a dividend is declared it is a debt due from the corporation to the stockholder and is recoverable as such.” In the latter part of this section we read as follows: “In a case where a dividend had been declared payable at a future day, but no fund was set aside for its payment, and before payment the corporation became insolvent” it was held that the stockholders to the extent of their proportions of such dividends should share ratably with the creditors of the corporation.

In support of this finding the court cites Lowne v. American Fire Insurance Company et al, Sixth Page’s Chancery Reports, page 482; Hunt, Receiver, v. O’Shea, Assignee, 69 N. H. Reports, page 600; Curry, Garnishee, v. Woodward, 44 Ala. Rep., page 305.,

Question 4 reads as follows: ‘ State whether the books of the corporation show, or ever did show, the amount of money sued for in this case, or any part thereof credited to the name of •Joseph Kramer, and whether any writing or note was ever given by the corporation to Joseph Kramer evidencing this sum or any part thereof, as a debt?”

To this the jury also answered “No,” which, no doubt, is in accordance with the evidence. This question was evidently asked on the theory that the law required that the action of a corporation declaring a dividend could not be shown by parol evidence, or that the records of a corporation could not 'be changed by parol evidence. While this .may be true in some states, and while it may be so held in some cases, there is no question but what in most of the cases cited showing informalities, parol evidence has been introduced for the purpose of showing that a. dividend had been declared. It was partially so in the case of Barnes v. Spencer & Barnes Company, in 162 Mich. Rep., on page 509. It was so in the case of Smith v. Moore in the 199 Fed. Rep., page 689. It is- also so in the case of Larwill v. Burke et al, in the 19 O. C. C., Rep., page 449. It was at least partially true in 70 N. J., Law Rep., in the case, óf Breslin v. Fries, Brieslin & Co., page 274. It was especially true in the case already cited of Groh’s Sons v. Groh, in the 80 N. Y. Appellate Division Reports, page 85.

If it even were the law that there must be a book account showing a credit to Joseph Kramer for the amount he claims in his petition, there is a -book account showing the amount that George Kramer actually received, and from that fact, together with the fact that Joseph Kramer had an equal number of shares of stock with George Kramer, the inference could easily be drawn as to what amount Joseph Kramer was entitled without the introduction of parol evidence. Especially is this the case since in the defendant’s answer defendant virtually admits that there was such an understanding as set forth in the petition, to-wit, that both should have an equal share oE this alleged dividend, by alleging. that Joseph Kramer agreed to accept and did accept certain sums in full discharge and satisfaction of his claim. Besides, this contention is re-enforced by the fact that in the defendant’s answer in the second paragraph thereof we find the following averments:

“Defendants allege that plaintiff and defendant, George PI. Kramer, through payments made in behalf of each individually by the corporation for various purposes about equalized each other on withdrawals from the surplus of said corporation, notwithstanding which said Joseph Kramer continued to complain about- the alleged expenditure in building the home of defendant, George IT. Kramer, and. demanded a like sum which was refused for the reason that he had been theretofore paid an amount equivalent to George Kramer.”

• So the court finds that part of the special verdict contained in the answer to question No. 4 of the special verdict is not in conflict with the general verdict, and neither does it establish facts which would preclude Joseph Kramer from obtaining judgment under the law.

The fifth and last interrogatory in the special verdict reads as follows: “Was there any credit ever made on the boobs of the corporation to the name of any stockholder of the corporation, with amounts to equalize the amount George Kramer drew proportionately to their various respective stockholdings?” To which the jury answered, “No.”

The court thinks that a part of the same reasoning which applied to question 4 applies to question 5. The same question arises as to whether or not the declaration of a dividend might be proven by parol evidence, and it is true that the case of Dennis v. Joslin Manufacturing Co., 19 R. I., 666, holds that it can not be so proven. But the court has already cited a number of cases in which such a dividend was either wholly or partly proven by parol evidence, and in the Groh case there was apparently nothing except parol evidence by which the declration of a dividend could be proven;

So that the court-can'not see that’the answer to question 5 is inconsistent either with the pleadings, the general verdict or the law.

The court having found that neither one of the answers in the special verdict given by the jury was inconsistent with the pleadings, the! general verdict or the law, the motion of the defendants for judgment in their favor, notwithstanding the general verdict for the plaintiff, will be overruled.

With this finding the' court might cease its labors in further dictating this decision. But certain questions have been suggested by the interrogatories in this special verdict,' and some of those questions can only |.be discussed by taking into consideration the evidence, or some of the evidence which has been adduced in this case. As the court has heretofore stated, the question in this ease is, was there a dividend declared under the rules of law and equity?

Counsel for defendant claim that on account of informalities and irregularities no such dividend was ever declared, and that therefore, the profits out of which the plaintiff claims his share of the dividend, always remained a part of the capital of the company, and that consequently the company was never indebted to Joe Kramer in the amount for which he has brought suit, or any other amount.

Counsel for. defendant .claim this, first on the ground that a dividend must be declared formally by the board of directors in joint session. It is unnecessary to discuss this proposition because counsel afterwards admit that there are exceptions to this rule, and that this case in some respects at least might come under those exceptions provided the facts in the ease would meet certain other conditions. And among those other conditions, is the second claim of defendants’ counsel that the reason there wasn’t a dividend declared is, that the dividend must be severed physically from the funds of the corporation.

I have discussed that proposition in passing upon its motion asking for a judgment notwithstanding the general verdict, and do not consider it necessary to. discuss it again. • - .

Another, or third requirement to the informal declaration of a dividend claimed by counsel for defendant is that there must be a book account or note or some written evidence of the stockholder’s share of the dividend. This I have also discussed under the motion, and do not deem it necessary to discuss it further under this head.

The fourth requirement, in ease there is no written evidence as claimed by counsel for defendants, in order to make an informal declaration of a dividend binding, is that the dividend must have already been divided among those entitled thereto; in other words, must have been paid to the various stockholders, because a division of profits without the formality of a dividend is equivalent to a dividend. And, as the court understands counsel for defendant, the dividend must be paid because if it is informally declared the doctrine of mahim prohibitum or pan delicto would apply. The doctrine of pari delicto could hardly apply in this ease, because it could not be said that the corporation was in delicto so far as the informalities are concerned, and the only one that.could be' in delicto would be the plaintiff, Joseph Kramer, because, as the court understands the term pari delicto, it means ih equal fault, that is, that all parties were at fault. The defendant claims that a contract that is in anywise illegal provided it is indivisible will not be rescinded if executed, and will not be enforced if executory. If this be true in such a ease as this, why should it not have been more true in the case of Groh & Sons v. Groh, in the 80 N. Y. App. Division Reports?

It is scarcely necessary for the court to state all the facts in that case, because counsel on both sides have read it carefully, but according to the evidence in that case none of the rules- and regulations applying to corporations were observed. They even had a faulty and very unsatisfactory system of bookkeeping. The books of the firm did not even show the profits, and they had to resort to parol evidence to show that there were sufficient profits to pay the dividend to John Groh and. his mother.

Yet there was nothing said in this case in regard to pari delicto, malum prohibitum, or anything of the sort. But counsel for defendant may say that the reason there was nothing said about the principles which he wishes to invoke as against Joseph Kramer, that the money had already been paid out, and, therefore, the court would not disturb the same because that was a contract executed, or a transaction already completed. But we must remember that the corporation brought this suit against John Groh. The corporation was not in delicto. The doctrine of malum prohibitum did not apply to the corporation. The corporation was the victim, if anyone was the victim, of the in-formalities and irregularities, and illegalities, if you please, of John Groh and his mother. So that the court could have very easily said that because of the doctrine of malum prohibitum and because the corporation is not at fault the court could disturb what had already been completed. John Groh was in delicto. The doctrine of malum prohibition applied to John Groh, and did not apply to the corporation. Why should not the court have disturbed what had already been exehcuted or completed, if John Groh was in delicto and the corporation was not?

Taking the case of Barnes v. Spencer & Barnes Company, 162 Michigan Reports. Barnes sues the company. There are in-formalities and illegalities to which Barnes was a party. Barnes was in delicto, if anyone was. The doctrine of malum prohibitum applied to him, if it applied to anyone on account of informalities and irregularities, and neither doctrine applied to the corporation which Barnes sued. Yet in the decision we find nothing in regard to either doctrine as applying to the plaintiff, Barnes. ■

In the case of Breslin, defendant in error, v. Fries-Breslin & Company, plaintiff in error, on page 283, quoting Kent v. Quicksilver Mining Company, 78 N. Y., 159, the court, says, it was held that corporate acts not per se illegal, but which are ultra vires affecting only the interests of the stockholders, may be made good by the assent of the stockholders. And in this case the directors and stockholders were guilty of all the informalities in the calendar, with the exception that there was a book account showing a dividend. And so we find that in cases of the informal declaration of dividends, and on the ground of informalities, the doctrine of pari delicto or malum prohibitum has not been applied. The court does not believe that the doctrine of pari delicto or malum prohibitum applies to this case or similar cases.

I have now come to the last proposition of counsel for defendant: why there was not a dividend declared, such as would entitle a stockholder to recover against the company, and that is that the dividend must be divided pro rata. .There is no question but what this rule is more universally applied by the authorities than any requirement pointed out by counsel for defendant- It is true that both Cook and Thompson state that a dividend must be divided pro rata; that is, that stockholders in the same class must be given the same percentage of profits on their stock. It is also true that the evidence shows in this case that in the agreement the only stockholders’ names were George Kramer and Joseph Kramer. It is true that the evidence also shows that George Kramer and Joseph Kramer wholly controlled and managed this business, and the evidence tends to show that their brother Henry Kramer was an ordinary laboring man without an education, and evidently not endowed with executive ability in this or any other business. If the court remembers the evidence correctly, Henry Kramer was first simply given an ■ interest in the partnership and afterwards an equal interest in the corporation, in order to encourage him in his work, but at any rate, at the time that this agreement was entered into between George and Joseph Kramer, Henry Kramer w'as the owner^, of some thirty shares of stock, however he may have secured the same. He was considered a bona fide stockholder, and was treated as such by the two brothers, George and Joseph. As this court remembers it, at the time of the declaration of this alleged dividend there were two stockholders in whose names there was one share of stock, in order to make up the legal number of directors. In other words, these two were only nominal stockholders and were not really bona fide stockholders. The evidence further shows, that, before the incorporation, this company was a partnership, and, outside of keeping books, they did business without following strict business rules. The partnership was a family affair, and when it was incorporated it still continued to be a family affair. George, Henry and Joseph, after the incorporation, did business with each other just as they did in the partnership. Groceries, furniture, clothing and all family needs of all the former partners, when they became stockholders, were paid for out of the company treasury. Funeral expenses in the family of either of the brothers were paid out of the company treasury.

Prior to this agreement Henry had a lawsuit, the expenses of which amounted to $1,100, which were paid out of the company treasury. The expenses of pleasure trips of the brothers were also paid out of the treasury. So that when George came to build a house he talked the matter over with Joseph and together they agreed that he might pay the expenses of building a house by drawing money out of the company treasury, with the understanding that Joseph might draw an equal amount. The evidence develops that all three brothers were engaged in the foundry business, and all three knew that George was building a house, and they knew that George was obtaining the money out of the company treasury. The evidence also shows that the stockholders had the opportunity of becoming acquainted with the fact, and did become acquainted with the fact, that there was an understanding that Joseph Kramer should draw out of the treasury in some way, either by travel or otherwise, an equal amount of money with George. George built his house and drew out of the treasury something over eight thousand dollars for that purpose. True, Joseph took some pleasure trips, but so did George, and there is évidenee tending to show that the expenses for the pleasure trips about equalized each other, because Joseph claimed, and gave some testimony tending to show, that some trips which George claimed were. pleasure trips on Joseph’s part, were business trips for the company.

This state of affairs continued, all the stockholders, directors, and officers acquiescing and consenting so far as the evidence shows, f,o the agree.mgpt that had been entered into between George and Joseph Kramer, np until some time in October, 1912. Up until that time business had been carried on as formerly in a very informal way, without the meeting of directors or officers. Some time in October, 1912, after George Kramer had secured the majority of the shares they began to hold formal meetings, and it was at one of these formal meetings in October, that Joseph Kramer demanded he should be paid a sum of money equal to that paid to George Kramer. It seems that George Kramer at first refused, claiming that he had drawn an equal amount of money out of the funds of the treasury with what he had used for building the house. There is no denial that the arrangement had been entered into that Joseph should draw an amount equal to what George had drawn for building his house. In fact, all parties admit, according to the evidence, that there was such an arrangement and that Joseph was entitled to an equal share, but that Joseph had been paid.

The result of the dispute was that they agreed to give Joseph $2,000, but called it a “ donation ’ ’ on the books of the company. Joseph, in his evidence, claims that they really only gave him $1,000, and there is some evidence tending to show that this was charged against Joseph in some other matter. At any rate, the jury found that Joseph, in the end, was not even given the $2,000.

The defendant in its answer states that Joseph frequently complained that he had not been made equal with George. And so the business of the firm went on until some time in 1914, when George purchased Joseph’s interest. During all the period from 1907, when it is alleged that the agreement had been entered into between the two brothers, up until Joseph sold his interest in the firm to George, no member of the firm ever disputed, and in fact all of them admitted, that there was such an arrangement, and that Joseph was entitled to an equal amount with George, and the only claim that was made was that Joseph had been paid.

So that under the evidence it appears that at least all the stockholders and officers of the company knew of this arrangement, consented and' acquiesced theyeiP. and the court might almost say that at the meeting of the directors in October, 1912, they had not only consented and acquiesced therein, but they ratified the same, if not formally, at least informally.

Now, the question is, under these circumstances, what shall be said of the proposition that the dividend, if there was one, must have been divided pro rata between George Kramer, Joseph Kramer and Henry Kramer, or any other stockholders? It is true that the authorities hold that the dividend must be pro rata among the stockholders of the same class, and what would be said or what should be said in case some other division should be made? Henry Kramer had just received $1,100 for the purpose of paying the expenses of a lawsuit. George, Joseph and the other stockholders seem to have consented and acquiesced in this arrangement. So it would be natural to suppose that Henry would consent and acquiesce in the arrangement which George and Joseph Kramer had made in regard to the alleged dividend; and the other members being nominal stockholders would naturally have no objection to such an arrangement. At any rate, the evidence tends to show thát all the stockholders and all the directors and all the officers did consent and acquiesce in the arrangement that Joseph and George made some time in 1907. And, as the court has already said, substantially ratified the same at a directors’ meeting in October, 1912.

Now, it is true the general rule is that when a dividend is declared by the board of directors it must be pro rata among the stockholders of the same class. There is no question but what this is a wise rulé, especially when applied to corporations where there are stockholders who are not members of the board of directors, especially when the stockholders are not familiar with the business of the concern.

Most of the. decisions apparently hold that there must be a pro rata division of dividends among stockholders of the same class. But the court has 'been unable to find a case where there was not a pro rata division made in which the only shareholders-were directors and all shareholders consented to a division other than -pro rata, in which it -was held that such, a division would not be good under the law and the principles of equity. The court has been able to find but one case bearing upon this proposition, and this ease is found in the 70 N. J. Law Reports, page 274, in the case of Thomas J. Breslin, defendant in error, v. Fries-Breslin Company, plaintiff in error.

In that ease there were as many irregularities and informalities, if not more, than in the ease before the court, and the only difference between that case and the case before the court was that the stockholder, Thomas J. Breslin, who brought suit, had standing on the books of the corporation the amount of money which had been credited to him as profits. In that ease the directors of the corporation did not observe the statute law of the state of New Jersey, in failing to declare their dividends on the first day of August in each- year, and they also failed to specify any other day, which the Legislature provided for, if they did not so declare a dividend on the first day of August. Another irregularity was that there were six members all of whom were directors, and it appears that at a certain meeting, four members out of six played a game of freeze out and passed a resolution that the common stock of three of the members should be transformed into preferred stock guaranteeing a dividend of fifteen per cent., against the objection of two of the members, McGill and Murphy by name; and it appears that three of these members, during the transactions involved in this suit, were the only directors in charge of the corporation. While these members apparently met informally, took inventories once a year, and figured out the preferred dividends and then the common stock dividends, there were never any dividends formally declared, and no minutes were kept of any of the meetings; no formal resolution was at any time passed; three of the directors instead of six did what business was done; no resignation was received from the three members whose stock had been voted out of the common stock class into the preferred stock class. And besides this, because it is directly in point to the proposition now under consideration, the three men who remained as directors had common shares of stock as follows: John M. Carroll, 200 shares; Fries, 100 shares; Breslin, 100 shares, and yet Breslin, who sued, brought suit for one-third of the profits on the common stock, although he was only entitled to one-fourth under the general rule, because Carroll was entitled to one-half, Fries one-fourth and Breslin one-fourth.

Now, what did the court say in that case? We will first read the syllabi, as follows:

"1. The doctrine of equitable estoppel applies to the internal concerns of stock corporations. Saving, so far as public policy and the interests of creditors and other third parties are involved, the stockholders may bind themselves inter sese and in favor of the corporation by their own acts and agreements; and what will bind all the stockholders with respect to an obligation from the company to one of its members, will bind the company as such.”
“2. Unanimous consent and acquiescence of the stockholders, acted on by the parties concerned to such an extent as to materially change their position, preclude the assenting stockholders as individuals and the corporation as such, from after-wards setting up legal informalities in matters of internal concern affecting only the interests of the stockholders, to the overthrow of rights that have been acquired on the faith of the consent and acquiescence.”

On page 276 we read as follows:

“The principal questions raised by the bills of exceptions are whether there was any lawful evidence justifying a finding by the jury that these amounts, respectively, were lawfully declared and set apart to the plaintiff as dividends by the board of directors. ’ ’

The share of the dividend sued upon appeared in a book account, credited from April 25, 1893, to December 31, 1898. The action was commenced in November, 1902. The court says, on page 280:

“To sum up, the jury was justified, by the evidence, in finding,” * * * then on page 281, near the top of the page, * * * “that the three directors, during the period in question, acted unanimously and with the acquiescence of all the stockholders in ascertaining the profits at stated times, in determining what amount should be reserved as working capital and in setting apart the residue of the profits for distribution among the stockholders; that in such distribution preferred stockholders were first paid or credited amounts aggregating fifteen per centum per annum upon their stock and the residue was divided among the common stockholders, not pro rata, according to their holdings, but in a manner satisfactory to them and acquiesced in by all the stockholders. ’ ’

On page 282, the last sentence of the first paragraph reads as follows:

“In respect to these matters the jury was fully justified in finding that unanimous consent of the stockholders of the defendant company had been given and had been acted on in good faith by the plaintiff and others concerned during a course of years, and that plaintiff could not be restored to the status quo ante were the assent of his fellow-stockholders and of the company to be now withdrawn.”

In the next paragraph we read:

‘ ‘ In the eye of the law corporations are entities, separate and distinct from their constituent members and not bound by the individual acts of the latter. The law deals with the corporation as an artificial person. Equity realizes that this legal entity is but a legal fiction; looking through the form it discerns the substance. It finds that a stock corporation is in essence' an aggregation of individuals, a statutory partnership with assignable membership and limited liability of the members, and so the doctrine of equitable estoppel applies fully to all the internal concerns of stock companies. 'Saving so far as public policy and the interests of creditors and other third parties are concerned (none of which is involved in the present ease), the stockholders may bind themselves inter sese and in favor of the corporation by their own acts and agreements, and what will bind all the stockholders, with respect to an obligation from the company to one of its members, will bind the company as such.”

Going on in the next paragraph, the court says:

“The authorities to this effect are abundant.” And then quotes a number of authorities, and ends on page 284, in citation of authorities as follows:
“Although estoppels be based upon equitable considerations, they are none the less available in the courts of law.”

And then cites some five or six cases in support of this proposition. In the next to the last paragraph on page 284, we read that, among sundry exceptions raised concerning the instructions to the jury, they raised the question as to the method of apportionment that was pursued. On page 285, in the paragraph at the bottom of the page, we read in part as follows:

“The trial justice further charged the jury, in effect, that whenever the directors set apart a portion of the profits of the company for division among the stockholders, it is their prima facie duty to apportion the dividend among the stockholders pro rata to their several holdings; but that if all the stockholders who are entitled to participate in the division authorise, ratify or acquiesce, in any distribution of the fund among themselves, differing from the ordinary pro rata division, the directors may make the division in accordance with such authorization, ratification, or acquiescence of all the stockholders. He Left it to the jury to say, upon the evidence, whether the division actually made of the profits as between the stockholders in the case at hand was authorized, ratified or acquiesced in by the holders of all the stock.”

On page 287 we find the following at the end of the first paragraph:

“It is true that the directors are trustees for the several stockholders, charged with the duty of properly apportioning among them the moneys thus set apart for their use. And so the judge charged the jury. But it can not be doubted that the stockholders may, by unanimous consent, adopt and become- bound by a different mode of division.”

We find in this case that the judgment of the lower court was affirmed. The court has failed, as it said before, to find a single case in which it was held it was error to divide a dividend other than pro rata in case all the stockholders involved consented or acquiesced therein. This is the only case the court has been able to find decided, when all the stockholders did acquiesce in a division other than pro rata.

This decision is quite lengthly or the court would quote it in full. It not only bears upon the question of pro rata division of profits, but bears upon every proposition raised in this case. And. as already quoted, notwithstanding that illegalities, in-formalities and irregularities appear in the declaration of the dividend involved in the ease, the court substantially holds, on page 283, that all these illegalities, irregularities and informalities were not per se illegal.

' Since the evidence shows that what was done of an informal nature in the case now before the court, was done by unanimous consent and acquiescence of the stockholders, and that there-is evidence tending to show that Joseph Kramer acted upon said consent and acquiescence to such an extent as to materially change his position, because when he sold his stock he lost every other remedy, if he had one, except the one to which he resorted in bringing this suit.

For this reason, provided the jury has -been correct in finding the facts, the court would hold that the stockholders, as individuals, and the corporation as such, are precluded from setting up the legal informalities in matters of the internal concerns affecting only the interests of the stockholders of this company. There are a number of other authortiies which have been quoted by counsel for plaintiff bearing upon the propositions raised in this case. .

Taking into consideration all the law and the evidence, the court thinks that the jury had a right, under the law and the evidence, to return a verdict such as it did, and, therefore, will overrule the motion for a new trial.  