
    Harold D. Watson, Appellant, v. Columbia Mutual Building and Loan Association of New York, Respondent.
    
      Building and loan association — certificates of stock issued by it — a holder is entitled to dividends only out of profits—effect of profits, less than the amount mentioned in the certificate, having been earned.
    
    The by-laws of a building and loan association provided that on the capital stock there should be paid annually, “out of the profits earned, a dividend not exceeding 7^| per cent upon the face value thereof, such dividend to be ascertained at the annual meeting of the Board of Directors.” The act under which the association was incorporated (Laws of 1875, chap. 564, § 1, amdg. Laws of 1851, chap. 122, § 7) provided that no dividends should be declared except from the earnings of the association. The certificates of stock issued by the association provided: “Profits to the extent of 7^ per cent per annum will be paid on par value of this certificate annually.” Attached to the certificates of stock were coupons which, on their face, purported to be absolute promises to pay, semiannually, interest at the rate of seven and three-tenths per cent per annum.
    In an action brought to recover upon such a coupon it was
    
      Held, that the plaintiff’s right to dividends upon his stock was contingent upon' a sufficient amount of money being earned to warrant a dividend and the actual declaration of the dividend;
    That the fact that the association had actually earned, during such period, two per cent profits, did not entitle the plaintiff to recover upon his coupon at the rate of two per cent, it not appearing that the failure to declare such dividend was due to bad faith upon the part of the directors.
    Appeal by the plaintiff, Harold D. Watson, from a judgment of the Municipal Court of the city of New York, borough of Brooklyn,-in favor of the defendant, entered in said court on the'8th day of August, 1901, upon the decision of the court.'
    
      Robert S. Kristeller, for the appellant.
    
      William Hepburn Russell [William Beverly Winslow and John E. Ruston with him on the brief], for the respondent.
   Willard Bartlett, J.:

The defendant is a corporation organized under the laws of this State relating to building, mutual loan and accumulating fund associations. The plaintiff is the owner and holder of a certificate issued by the defendant entitling him to five shares of the capital stock. Attached to this certificate, is a coupon in the following words: '

The Columbia Mutual Building and Loan Association of New York will pay to bearer at its office Eighteen 25/100 Dollars on the first day of July, 1901, being dividend due on Certificate No. 1544. ' JOHN J. PARSONS, Treasurer .”

The present suit was instituted to recover eighteen dollars and twenty-five cents upon this coupon, treating it as an absolute promise to pay that amount. It was proved on the trial that the net earnings of the defendant corporation for the six months immediately preceding July 1, 1901, were only two per cent, and that no dividend was declared for that period. Upon this proof, together with the certificate to which the coupon was attached, the original by-laws of the defendant and its articles of association, the trial court held that the coupon was a promise to pay only in the event that a dividend of seven and three-tenths per cent was actually earned and declared by the company, and, therefore, that the defendant was entitled to judgment dismissing the complaint upon the merits. From that judgment this appeal is taken.

Referring to the certificate we find that it declares the holder to be entitled to the number of shares of capital stock therein specified, subject to the Articles of Association and the conditions printed on the back hereof, which are made part of this contract.” Among the conditions indorsed thereon are these: “ 1st. This certificate shall participate in all profits arising from purchase and sale of real estate, as per Sec. 3, Article 8, of Articles of Association. 2d. Profits to the extent of 7 per annum will be paid oil par value of this certificate annually.” In regard to the class of stock issued to the plaintiff by means of this certificate, the by-laws contained this provision : “ These shares shall be paid annually out of profits earned, a dividend not exceeding 7-fiy per cent upon the face value thereof, such dividend to be ascertained at the annual meeting of the Board of Directors.”

One of the acts under which the defendant was incorporated provides that no dividend shall be declared except from the earnings of the association. (Laws of 1875, chap. 564, § 1, amdg. Laws of 1851, chap. 122, § 7.)

When we consider the statutes under which the defendant is organized, the articles of association and by-laws and the plaintiff’s certificate and coupon together, it is quite plain that the contract between the corporation and the holder of the certificate and coupon imports, not an absolute promise to pay, but a promise to pay only in the event that a sufficient amount of money is earned to warrant a dividend. and a dividend is declared. This is manifest from the repeated reference to the fact that the promised payment is to be made out of profits; implying that the earning of profits was a condition precedent to any payment. In the case of House v. Eastern Building & Loan, Association (52 App. Div. 163, 166), the certificate provided that the holder upon withdrawal before maturity should receive the full amount paid for his certificate “with dividends at the rate of 6 per cent per annum.” This was held to be an obligation not to pay a certain sum with affixed rate of interest, but with a certain rate of dividend, and it was held that the defendant did not thereby guarantee that the earnings should reach a certain figure, especially as an association of this kind was by various, principles of law and statutory provisions, prohibited from paying upon its stock dividends at any greater rate than it actually earned. The by-law relating to such shares as those owned by the plaintiff was consistent with the charter of the defendant, and binding upon-the certificate holder. (Engelhardt v. Fifth Ward Loan Association, 148 N. Y. 281, 286.) That by-law, as already stated, provided that such shares should be paid a dividend not exceeding seven and three-tenths per cent annually upon the face value thereof out of profits earned,” thus plainly showing that the seven and three-tenths per cent was merely the maximum which the holder could receive out of the profits earned. The language employed negatives any idea of an. absolute engagement to pay that amount unless it was earned.

It may be suggested that, assuming the correctness of the views thus far expressed, the plaintiff was nevertheless entitled to recover something upon, the coupon, inasmuch as the evidence showed that the corporation had earned two per cent profits for the six months next preceding July 1, 1901, although no dividend of such profits had been declared. If it appeared that the failure to declare a dividend of these profits was due to bad faith on the part of the directors, or proceeded from anything hut a fair and honest exercise of their discretion, it may be that the plaintiff would be entitled to

compel such action on their part as would enable him to obtain a dividend at the rate of two per cent. The directors, however, may have deemed it for the best interest of the corporation and its members to postpone the declaration of a dividend until a larger one could be made, and I am not prepared to say that they violated any right of the plaintiff in so. doing. (See Reynolds v. Bank of Mt. Vernon, 6 App. Div. 62; affd., 158 N. Y. 740.)

I think the judgment should be affirmed.

All concurred.

Judgment of the Municipal Court affirmed, with costs.  