BERKS BROADCASTING CO v CRAUMER 6.
From that the controlling stockholders through the BOD declared and paid
1947 | Stern, J. | | Dividends/Purchase of Shares by Corporation
PETITIONER: Berks Broadcasting Co.
RESPONDENTS: Craumer, et al. (there are 3 defendants daw but the case did not
say who)
(P.S. Couldn’t find the whole case online pero mukhang di naman na-cut yung sa
Campos na book)
SUMMARY: The capital structure of BBC was restructured. As a result of which,
there was a surplus. But this depended on the inclusion in the assets of the “write-
ups” or increases in the value of the properties less depreciation. The company
declared dividends because of the surplus. The company was then sold. The new
stockholders sued Craumer et al for the recovery of the illegally declared dividends.
The US SC held that the declaration of dividends was illegal because the surplus was
not founded on actual earnings of profits of the company.
DOCTRINE: Ratio 2
FACTS:
1. Craumer, et al. and one Landis incorporated and organized Berks Broadcasting
Co. (BBC) for the purpose of constructing and operating a radio broadcasting
station in Reading.
2. Authorized capital stock was $100,000 and stock in that amount was issued to
the 4 incorporators who became BBC’s directors.
3. According to the book entries of BBC, the stock was fully paid for by the receipt
from each of the shareholders of $5,000 and by the fixing of a value of $80,000
upon an asset denominated “Franchise and Promotion Expenses.” This item was
eventually written off the books and in its place were substituted entries
(1) of $50,000 as an amount “Due on Unpaid Stock Subscriptions and
(2) of the ff “write ups” or increases in the valuation of fixed assets of the
company over and above the cost of those assets less depreciation (properties
were enumerated including their respective prices).
4. The capital structure of BBC was restructured. Part of which was the clearing of
the Unpaid Stock Subscriptions account balance with additional investments
from the stockholders. In lieu thereof, an item in the same amount was entered
as an asset under the designation “Goodwill and Promotion Expense.”
5. The net result of this procedure was a surplus (assets in excess of liabilities). The
surplus depended on the inclusion in the assets of the “write ups” which still
remain on the balance sheet for if that amount were eliminated, there would be a
deficiency.
dividends. During the period of declaration and payment of dividends, the sale
of the corporation to a new group was perfected and was just awaiting the
approval of the Federal Communications Commission.
7. In this present suit, the new stockholders are suing for the recovery of the
dividends paid to the former stockholders since it has been unlawfully declared
from a surplus which included the revaluation increment for the asset or the
unrealized appreciation of its value.
ISSUE: WON dividends may be declared and paid out of surplus which is
constituted by the recorded but unrealized appreciation of corporate assets – NO
RULING:
RATIO:
1. It is illegal to declare and pay dividends from other than a surplus consisting of
an excess in the value of the assets over the aggregate of the liabilities and the
issued capital stock.
2. The surplus from which dividends must be taken must be a bona fide and not an
artificial or fictitious one. It must be founded upon actual earnings or profits
and not be dependent for its existence upon a theoretical estimate of an
appreciation in the value of the company’s assets. Such reappraisals are subject
to market fluctuations, or, merely anticipatory of future profit, or, may never be
actually realized as an asset of the company.
3. The Business Corporation Law of 1933 expressly disallows such a funding of a
dividend declaration and payment.
4. Since the “write ups” represented an unrealized appreciation in value of the
company’s fixed assets, their inclusion in determining the existence of a surplus
from which dividends must be declared was unlawful, and since, when
eliminated, there would be a deficiency in capital, it would follow that the
corporation is now entitled to recover from the defendants the amount
improperly distributed by them as dividends.