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PHILADELPHIA v. PHILADELPHIA TRANSPORTATION CO. (10/18/56)

October 18, 1956

PHILADELPHIA
v.
PHILADELPHIA TRANSPORTATION CO., APPELLANT.



Appeal, No. 329, Jan. T., 1956, from order of Court of Common Pleas No. 2 of Philadelphia County, June T., 1956, No. 10546, in Equity, in case of City of Philadelphia et al. v. Philadelphia Transportation Company et al. Order affirmed.

COUNSEL

Hamilton C. Connor, Jr., with him Peter Platten, Allen Hunter White, and Ballard, Spahr, Andrews & Ingersoll, for appellants.

David Berger, City Solicitor, with him William D. Valente and Jacob J. Siegal, Assistant City Solicitors, and Levy Anderson, First Deputy City Solicitor, for appellees.

Before Stern, C.j., Jones, Bell, Chidsey, Musmanno and Arnold, JJ.

Author: Stern

[ 386 Pa. Page 233]

OPINION BY MR. CHIEF JUSTICE HORACE STERN

This is an appeal from the grant of a preliminary injunction restraining the payment of a dividend to its stockholders by the Philadelphia Transportation Company.

The dividend in question - one of thirty cents on each share of the common stock of the Company, payable October 1, 1956, - was declared by the Board of Directors on August 28, 1956. The action thus taken was over the objection of the City's members of the Board, who contended that the dividend was illegal in that it impaired the capital of the Company.

The City of Philadelphia, the Mayor of the City, and the City's representatives on the Company's Board of Directors, brought the present action in equity to restrain the payment of the dividend. Their complaint alleged that the aggregate of the Company's assets did not exceed $50,000,000, that its liabilities exceeded $68,000,000, that its capital stock exceeded $26,000,000, that its capital deficit was therefore not less than $44,000,000, and that there was no earned surplus from which a dividend might lawfully be paid. It was averred that unless the payment were restrained by the court the damage to the City of Philadelphia would be irreparable. On plaintiffs' motion the court, on September 13, 1956, enjoined defendant, until further order, from paying the proposed dividend, and directed that a further hearing should be had on September 18. Meanwhile defendant filed preliminary objections to the complaint and also a motion to dismiss the preliminary injunction. The scheduled hearing began on September 18 as ordered, during the course of which the

[ 386 Pa. Page 234]

    court refused the motion to dissolve the preliminary injunction and dismissed the preliminary objections. On September 19, defendant took the present appeal from the grant of the preliminary injunction, and the further taking of testimony was thereupon continued, to be resumed at a date to be subsequently fixed.

The law governing the question of the legality or illegality of the declaration and payment of a dividend by a corporation is firmly established by both statutory and decisional law. The Act of May 23, 1913, P.L. 336, provides: "That all corporations ... may, at any time or times, declare dividends of so much of their net profits as shall appear advisable to the directors; ... but such dividends shall in no case exceed the amount of the net profits actually acquired by the company, so that the capital stock shall never be impaired thereby." And in Berks Broadcasting Company v. Craumer, 356 Pa. 620, 623, 624, 52 A.2d 571, 573, 574, it was said: "One of the basic principles of corporation law is that the capital of a corporation must not be impaired in any manner, except, of course, as such an impairment may involuntarily occur through losses resulting from the operation of the company's business. 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. The object of this prohibition is to afford a margin of protection for creditors in view of the limited liability of the shareholders, and also to protect the interest of the shareholders themselves by preserving the capital so that the purposes for which the corporation was formed may be carried out." It is obvious, therefore, that if the allegations of the complaint in the present action should ultimately be established as true, namely, that there does exist a capital deficit of not less than $44,000,000, and that there was

[ 386 Pa. Page 235]

    no earned surplus from which the dividend might lawfully be paid, such payment would be illegal and should be enjoined at the instance of a proper party in interest. While defendant Company has not yet filed an answer to the complaint it appears from the discussion in the course of the hearing before the court below that the Company strenuously denies these averments of the City and, on the contrary, maintains that its assets amount to $102,000,000 and that therefore the payment of the proposed dividend would be entirely legal as coming out of earned surplus and not involving any capital impairment. It is clear that the issue thus raised is purely a factual one which can be decided only on the basis of the testimony taken and to be taken at the hearing before the court below which was interrupted by the filing of this appeal. Pending the determination of this controlling question the issuance of a preliminary injunction was entirely proper, and indeed practically necessary in order to preserve the rights of the City in case the issue should finally be decided in its favor, because it would otherwise have suffered irreparable harm had the dividend actually been paid meanwhile to the Company's 24,000 stockholders scattered throughout the country: cf. Pennsylvania State Chamber of Commerce v. Torquato, 386 Pa. 306, 125 A.2d 755; in that event there would not be any adequate remedies at law available to the City which therefore would be entitled to seek equitable relief by way of a preliminary injunction: Duquesne Light Company v. Upper St. Clair Township, 377 Pa. 323, 105 A.2d 287. On the other hand, the stockholders, if it be ultimately determined that the dividend was properly payable, would have suffered merely a temporary delay in their receipt of the dividend payments, unavoidable under the circumstances. Of course it is important that the hearings on the issue involved should be conducted

[ 386 Pa. Page 236]

    by the parties and the court as expeditiously as possible.

As far as the present appeal is concerned, it has been stated over and over again that on an appeal from a decree awarding a preliminary injunction the Supreme Court will consider only whether any apparently reasonable grounds for the action of the court below existed, and the decree will be affirmed unless the record presents palpable legal error.*fn1

This brings us to the principal contention of the defendant, namely, that the court below erred in the granting of the injunction because the averments of the complaint did not establish that the City of Philadelphia had the legal status or was such a party in interest as to entitle it to contest the payment of the dividend. The court, in a well considered opinion, decided to the contrary, and, in our opinion correctly. It is not necessary to discuss in detail all the provisions in the agreement of July 1, 1907, between the City and the Company's predecessor*fn2 which gave to the former extensive rights in the management and control of the Company and covered various other aspects of their relations. Suffice it to say that the City, under the terms

[ 386 Pa. Page 237]

    of that agreement, has substantial direct interest in the Company's financial affairs. Among the provisions is that the Company must pay an annual fee of $360,000 to the City in lieu of license fees; the Company is required to make payment to the City for the franchises granted on a sliding scale basis which, at the present time, is said to approximate $1,000,000 per year; the increase of capital stock or further indebtedness by the Company of the assumption of further obligations without the consent of the City is prohibited; the liquidation of stocks, leaseholds or franchises without the consent of the City is prohibited; the acquisition of additional capital equipment and the raising of funds for capital expenditures without the consent of the City is prohibited; there is a provision for the payment of a share of the Company's profits to the City after a specified amount of profit has been earned; the Company is required to file an annual statement with the City Controller of receipts and expenditures for examination and report to City Council; the Company is required to keep and maintain at all times the property and certain large subway and elevated facilities which had been constructed by the City, including buildings, equipment and rolling stock demised thereunder, in good condition, maintenance and repair during the life of the lease. From all such provisions it must be apparent that the City is not only in the position of a general creditor of the Company, as appellant apparently concedes, or of an obligee entitled to the performance of the Company's various contractual obligations, but its rights as such, as well as in its capacity as lessor and as the holder of an option hereinafter referred to, give it a far greater interest in connection with the management and finances of the Company than even an ordinary creditor might have. Not only is it hornbook law that a mortgagee, lien creditor or contingent remainderman

[ 386 Pa. Page 238]

    may enjoin the mortgagor, debtor or life tenant from committing any acts injuring or tending to injure the property, but, by the Act of May 21, 1921, P.L. 1045, any creditor, even one whose claim has not yet matured, may restrain an insolvent debtor (as the City's allegations would stamp the Company as being) from disposing of his or its property without a fair consideration and irrespective of any actual fraudulent intent (which here, of course, does not exist).

However, most important of all on this question is the provision of the agreement between the City and the Company which gives to the City the right to purchase all the Company's property upon any first day of July thereafter upon payment of an amount equal to the sum of the face amount, or call price if any, and accrued interest of all then outstanding bonds, and all then outstanding prior lien bonds, mortgages and ground rents on the Company's property plus the par value of all its then outstanding preferred stock and an amount equal to ten (10) dollars per share for all its then outstanding common stock and the amount of its then undistributed corporate surplus, if any, this right to cover the entire transportation system and property, leaseholds and franchises of the Company at the time the City exercises the option. Thus it will be seen that an illegal disposal of any part of the Company's property, which includes, of course, its cash assets, would correspondingly diminish the value of the property at the time when the option might be exercised. The Company argues that if the present proposed dividend is being paid from ...


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