4

Although interest is payable out of earnings before any dividend can be made to stockholders, it cannot be deducted for the purposes of ascertaining the "net earnings" of the road; for, it is said, the bonded debt incurred for the purpose of construction and equipment is but another form of capital, analogous to preferred stock; and the interest accruing thereon is in the nature of a dividend on such capital. "It has nothing to do with, and cannot affect, the amount of the net earnings of the road." Net earnings are, strictly speaking, the gross receipts of the company less the expenses of the road necessary to earn them. But interest on debts and many other liabilities are to be paid out of these net earnings. After these obligations have been met, the surplus remaining constitutes the fund out of which dividends may be declared.5 The latter fund constitutes the net profits of the enterprise as distinguished from net earnings, or the synonymous term net income. The net profits of a company are sometimes designated by the term "surplus earnings."

6

1 Union Pacific R. R. Co. v. United States, 99 U. S. 402, 422; De Peyster v. American Fire Ins. Co. 6 Paige, 486; Scott v. Eagle Fire Ins. Co. 7 Paige, 198; Lexington etc. Ins. Co. v. Bage, 17 Mon. B. 412; 46 Am. Dec. 528; Green's Brice's Ultra Vires, 161. Cf. Corry v. Londonderry etc. R'y Co. 29 Beav. 263.

2 Union Pacific R. R. Co. v. United States, 99 U. S. 402, 422. In this case many other items properly chargeable to the several accounts are considered.

3 Union Pacific R. R. Co. v. United States, 99 U. S. 402, 422.

4 Union Pacific R. R. Co. v. United States, 99 U. S. 402, 423.

5 St. John v. Erie R'y Co. 10 Blatchf. 271, 279; affirmed in 22 Wall. 136; Warren v. King, 108 U. S. 389, 398; Van Dyck v. McQuade, 86 N. Y. 38, 47. 6 People v. Supervisors of Niagara, 4 Hill, 20, 23; Park v. Grant Locomotive Works, 40 N. J. Eq. 114.

7 Phillips v. Eastern R. R. Co. 138 Mass. 122. For further definition and explanation of "net profits" and similar terms, see Warren v. King, 108 U. S. 389; St. John v. Erie R'y Co. 22 Wall. 136; Nickals v. New York etc. R. R. Co. 21 Blatchf. 177; Heard v. Eldredge, 109 Mass. 258; 12 Am. Rep. 687; Park v. Grant Locomotive Works, 40 N. J. Eq. 114; Coltness etc.

Co. v. Black, 51 law J. Q. B. 626; Bloxam v. Metropolitan Ry Co. Law R. 3 Ch. 337; Bardwell v. Sheffield etc. Co. Law R. 14 Eq. 517; Hadley's Railroad Transportation, pp. 58-62.

8 Union Pacific R. R. Co. v. United States, 99 U. S. 402; Williams v. Western Union Tel. Co. 93 N. Y. 162, 191.

§ 302. Whether a company can have net earnings while in debt.—The term "net earnings" does not imply that the company is wholly out of debt.1 Nevertheless, the majority can overrule the minority upon the question of the division of profits while the debts of the company remain unprovided for. It has been argued that there can never, properly speaking, be any available income or profit so long as the corporation has any debt remaining unpaid, but the contrary is well established both in the mercantile world and in the decisions of the courts. If only those companies which are free from debt could be properly said to have made any profits, "there is hardly a railway in the kingdom which could pay any dividends at all to their stockholders." 3 A company may even borrow money with which to pay a dividend to an amount equal to the excess of its assets over its liabilities.1

1 Belfast etc. R. R. Co. v. Belfast, 77 Me. 445; Myles v. Northern etc. R'y Co. Law R. 5 Ch. 621; Barry v. Merchants' Exchange Co. 1 Sand. Ch. 80, 307

2 Stevens v. South Devon R'y Co. 9 Hare, 313.

3 Myles v. Northern etc. R'y Co. Law R. 5 Ch. App. 621. Acc. Mills v. Northern R'y etc. Co. Law R. 5 Ch. 621; Hadley's Railroad Transportation, p. 58.

4 Stringer's Case, Law R. 4 Ch. 475; Mills v. Northern R'y etc. Co. Law R. 5 Ch. 621. But see Hoole v. Great Western R'y Co. Law R. 3 h. 269; supra, § 297, note 13.

§ 303. To whom dividends belong-As between transferrer and transferree. -A court will not take cognizance of the time during which a dividend was earned, in a contest between transferrer and ·

2

transferree. Although a dividend be earned before a transfer of stock, yet if it be not declared until after, the transferree is entitled to payment thereof; for the profits of the enterprise, until set apart by the declaration of a dividend, remain a part of the stock itself, and will pass under a transfer of the shares. The vendor is entitled to a dividend declared before, but made payable at a date subsequent to a transfer of shares.3 And there can be no apportionment between vendor and vendee, of a dividend declared, but payable at stated intervals.* In case the transfer has not been registered, although the company will be protected in paying the dividend to the persons in whose name the stock stands recorded upon the corporate records, yet the transferree has a right to the dividends as against his transferrer; unless, of course, there has been a contract between them to the contrary. The transferree of preferred stock stands in the shoes of his transferrer with respect to arrears of dividends not declared, unless the latter has by the terms of the contract expressly reserved them to himself. But arrears of dividends on preferred shares not declared, cannot be assigned apart from the stock itself." If the dividends have been declared and the arrearage is in the payment thereof only, the transferree acquires no right thereto.1o A sale of stock in præsenti, but payable and deliverable in futuro, constitutes the vendor a quasi-trustee for the purchaser, and the latter is entitled to all dividends accruing thereafter."1 An offer to sell shares, which is subsequently accepted, entitles the vendee to dividends received by the owner while the offer was open.12 A contract to sell on demand entitles the vend

6

or to dividends accruing before the demand was made.13

1 Bailey v. Railroad Co. 22 Wall. 604, 637; Jermain v. Lake Shore etc. R. R. Cǝ. 91 N. Y. 483; Boardman v. Lake Shore etc. R. R. Co. 81 N. Y. 157; Brundage v. Brundage, 6) N. Y. 544; Jones v. Terre Haute etc. R. R. Co. 57 N. Y. 196; Curr e v. White, 45 N. Y. 822; Hill v. Newichawanick Co. 48 How. Pr. 42; Kane v. Bloodgood, 7 Johns. Ch. 93, per KENT; 11 Am. Dec. 417; Central R R. etc. Co. of Georgia v. Papot, 53 Ga. 342; Gifford v. Thompson, 115 M ss. 470; Granger v. Bassett, 98 Mass. 462; Foote's Case, 22 Pick. 239; Phelps v. Farmers etc. Bank, 26 Conn. 269; Goodwin v. Hardy, 57 Me. 143; 99 Am. Dec. 758; March v. Eastern R R. Co. 43 N. H. 515; 77 Am. Dec. 732; Brewster v Lathrop, 15 Cal. 21; Ryan v. Leavenworth etc. R. R. Co. 21 Kan. 35; Black v. Hom rsham, 4 Ex. 21. But see Dow v. Gould etc. Co. 31 Cal. 629, where it is held that a dividend belongs to the person holding the stock at the time the dividend accrues.

2 Phelps v. Farmers' etc. Bank, 26 Conn. 269.

3 Boardman v. Lake Shore etc. R. R. Co. 84 N. Y. 157, 178; Hill v. Newichawanick C. 71 N. Y. 593, affirming S. C. 45 How. Pr. 427, and 8 Hun, 453; Spear v. Hart, 3 Robertson, 420; City of Ohio v. Cleveland etc. R. R. Co. 6Ohio St. 489; Bright v. Lord, 51 Ind. 272; 19 Am. Rep. 732; De Gendre v. Kent, Law R. 4 Eq. 283; Wright v. Tuckett, 1 Johns. & H. 263. Contra, Black v. Homersham, 4 Ex. 21; Clive v. Clive, Kay, 600; Burrou hs v. North Carolina R. R. Co. 67 N. C. 376; 12 Am. Rep. 611. Cf. Curry v. Woodward, 44 Ala. 305.

5

Vide infra, § 305.

4 Clapp v. Astor, 2 Edw. Ch. 379. 6 Brundage v. Brundage, 69 N. Y. 544, S. C. 65 Barb. 337, 408; Jones v. Terre Haute etc. R. R. Co. 57 N. Y. 196; Currie v. White, 45 N. Y. 822; Hill v. Newichawanick Co. 48 How. Pr. 427: Clapp v. Astor, 2 Edw. Ch. 379; Central R. R. etc. Co. of Georg a v. Papot, 59 Ga. 342; Ambrose v. Riddle, 3 Md. Ch. 320; March v. Eastern R. R. Co. 43 N. H. 515; 77 Am. Dec. 732; Goodwin v. Harly, 57 Me. 143; 99 Am. Dec. 753; Foote, Appellant, 22 P ck. 299; King v. Follett, 3 Vt. 385; Ryan v. Leavenworth etc. R. R. Co. 21 Kan. 365, 433; Black v. Homersham, 4 Ex. Div. 24; Bates v. McKinley, 31 Law J. Ch. 389; Clive v. Clive, Kay, 600. Cf. Boston etc. R. R. Co. v. Commonwealth, 100 Mass. 399; Nichals v. N. Y. etc. R'y Co. 21 Blatchf. 177; Johnson v. Bridgewater etc. Co. 14 Gray, 274; and see the articles in 19 Am. Law Rev. 571, on "Title to Dividends

7 Hayatt v. Allen, 56 N. Y. 553; Brewster v. Lathrop, 15 Cal. 21.

8 Nichals v. New York etc. R. R. Co. 15 Fed. Rep. 575; Jermain v. Lake Shore etc. R. R. Co. 91 N. Y. 483; Boardman v. Lake Shore etc. R. R. Co. 81 N. Y. 157; Hyatt v. Allen, 56 N. Y. 553; Coey v. Belfast etc. R'y Co. J. R. 2 Com. L. 112.

9 Manning v. Quicksilver etc. Co. 24 Hun, 361.

10 City of Ohio v. Cleveland etc. R. R. Co. 6 Ohio St. 489.

11 Currie v. White, 45 N. Y. 822; Black v. Homersham, 4 Ex. Div. 24. 12 Cook on Stock & Stockh. § 543, citing Harris v. Stevens, 7 N. H. 454. 13 Cook on Stock & Stockh. § 513; Bright v. Lord, 51 Ind. 272; 19 Am. Rep. 732. Cf. Central R. R. etc. Co. of Georgia v. Papot, 59 Ga. 342; Southwestern R. R. Co. v. Papot, 67 Ga. 675.

§ 304. To whom dividends belong-As between life tenant and remainder-man. An ordinary or

regular cash dividend, declared during the continuance of a life estate, belongs to the life tenant,1 whether it were earned before or during the life tenancy. But with respect to stock and property dividends the decisions are by no means uniform. The general rule in America as to disposing of stock or property dividends between life tenants and remainder-men, is that if a dividend of that nature accrued or was earned before the life estate arose, it shall be treated as principal and belong to the corpus of the estate, without reference to the time when it was declared or made payable; but when the dividend accrued or was earned after the life estate arose, then that it shall be considered as income and shall belong to the life tenant.3 In a recent case decided in Maine, where a corporation purchased a number of its shares from the State, paying for them by the issue of bonds, and distributed these shares among the stockholders as a stock dividend, it was held that the equitable and proper division of the shares between an owner of a life interest in the original stock and the remainderman, was to give the stock dividend to the latter, but the income on the stock distributed as a dividend to the life tenant. In Massachusetts a different rule prevails. In that State stock dividends, however made, are regarded as principal, and cash dividends, however large, as income.5 The Massachusetts rule is followed in Rhode Island, and somewhat tentatively in the District of Columbia,” it has also become a part of the civil code of Georgia. But it is said to have "proved to be a very elastic rule in the State of its origin; for in Leland v. Hayden, while professing to adhere to