office in the City of Reading.'
It seems to me that this case is governed by basic principles of corporation law.
The assets of a corporation, as between the shareholders and the creditors of the corporation, are a trust fund for the payment of the corporate debts. As such, these assets cannot be distributed as dividends to the shareholders if the payment of these dividends will prejudice the claims of the creditors. Therefore, all dividends must be declared and paid from the earned surplus which is founded upon actual earnings or net profit. Act of May 23, 1913, P.L. 336, Sec. 1, 15 P.S. § 631; Berks Broadcasting Company v. Craumer et al., 356 Pa. 620, 623-624, 52 A.2d 571; Levin et al. v. Pittsburgh United Corporation et al., 330 Pa. 457, 469-470, 199 A. 332; Pardee et al. v. Harwood Electric Company, 262 Pa. 68, 73, 105 A. 48; 11 Fletcher, Cyclopedia of the Law of Private Corporations, 5329.
It follows from this rule that no corporation has the power to enter into an unconditional agreement whereby the corporation will pay future dividends without regard to its condition at the time of payment. 11 Fletch, supra § 5332; see Warren v. Queen & Co., 240 Pa. 154, 161, 87 A. 595; Pardee et al. v. Harwood Electric Company, supra, 262 Pa.at page 74, 105 A. 48.
When these principles are applied to this case, it is apparent that if the above quoted provision of the lease is interpreted as an unconditional guarantee by Railway of dividends, then to that extent the provision would be void and unenforceable.
The plaintiff contends that this provision, nevertheless, was intended to confer a benefit upon the shareholders, and thereby created a third-party creditor or donee beneficiary contract which can be enforced at this time. I disagree for several reasons.
First, there is no guarantee by the lessee, either in the lease or endorsed on the share certificates, that the lessee will pay $ 7,800 semi-annually to the shareholders. This fact distinguishes this case from the cases cited by the plaintiff in support of its contention, which cases were also decided according to the law of other jurisdictions.
Secondly, I think that any benefit to the shareholders is incidental rather than intended, and that therefore the third party cannot enforce the contract in his favor.
A study of all the provisions of the lease shows that all promises of the lessee, including the one to pay rent, were made to the corporation and not to its shareholders. All options to terminate the lease or to take any action upon any default of the lessee were given to the corporation. The corporation was the party that furnished the consideration for these promises.
This lease as a whole leaves Railway with nothing but its corporate name and the shell of its former existence.
These facts plus the fact that the lessee did not guarantee the payment of dividends are a very strong, uncontradicted indication that the provision in question was inserted in the lease not to confer a benefit upon the shareholders but as a convenient method for the inoperative and non-functioning corporate-lessor to declare and pay future dividends.
And thirdly, that even if this provision were intended to confer a benefit upon the shareholders, their right to enforce this provision is limited by their right to the benefit.
A stream can rise no higher than its source. The benefit the plaintiff desires is the dividends, but the plaintiff's right to these dividends is limited by the principles of corporation law which I have already discussed.
The only asset that Railway has is the rental income from the lease, and Railway must use this income to pay its debts. Until these debts are paid or funds set aside out of this income to pay them, there is no earned surplus or net income out of which to declare dividends.
Furthermore, a shareholder's right to dividends is not absolute, but arises out of the corporation's act, through its board of directors, of declaring dividends due and payable. Pardee et al. v. Harwood Electric Company, supra.
And if, under the circumstances of this case, the directors of Railway had not acted as they did in their resolution of July 11, 1949, but had allowed the income to be paid out in dividends, they might have been liable for the improper distribution of the corporation's capital. Pennsylvania Knitting Mills Corp. v. Bayard et al., 287 Pa. 216, 224, 134 A. 397; Cornell v. Seddinger, 237 Pa. 389, 85 A. 446.
Accordingly, the action of Railway's Board of Directors was proper, and the relief sought for by the plaintiffs cannot be granted. In so ruling, however, I do not mean to imply that the provision of the lease here involved is necessarily unenforceable as to future rental income when there are no corporate creditors to be paid.
The motion of the Reading and Southwestern Street Railway Company and the City Bank and Trust Company of Reading for summary judgment is hereby granted.