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Arizona Western Insurance Co. v. Constantin

decided as amended sept. 10 1957.: July 31, 1957.

ARIZONA WESTERN INSURANCE COMPANY, APPELLANT,
v.
L. L. CONSTANTIN & CO. AND S & C TRADING CO., INC., A CORPORATION (INTERVENOR).



Author: Biggs

Before BIGGS, Chief Judge, and GOODRICH and KALODNER, Circuit Judges.

BIGGS, Chief Judge.

Arizona Western Insurance Company (Arizona) instituted this suit against L. L. Constantin & Co. (Constantin) to recover dividends on 10,000 shares of preferred stock in Constantin held by Arizona nad authorized by the December 2, 1952 amendment to Constantin's certificate of incorporation.*fn1 This provided in pertinent part that "The holders of the preferred stock shall be entitled to receive, and the Company shall be bound to pay thereon, but only out of the net profits of the Company, a fixed yearly dividend of Fifty Cents (50›) per share, payable semi-annually." An identical provision appeared in the preferred stock certificate. Arizona was the record holder of the stock from on or about October 1, 1954 to on or about February 1, 1956.*fn2

Constantin's Board of Directors on December 28, 1954 adopted a resolution which read: "Resolved, that a dividend be declared on preferred stock at the interest rate of 5% to all * * * stockholders of record on December 30, 1954, payable January 15, 1955."*fn3 At the declared rate Arizona as the holder of 10,000 shares of preferred stock was entitled to dividends of $5,000. Constantin paid dividends on certain shares of its preferred stock but nothing was paid on the shares held by Arizona.

In 1955 no dividend was paid to any holder of preferred stock.

After a demand for dividends Arizona instituted suit on the basis of diversity.*fn4 The first count of the amended complaint related to the non-payment of the dividend declared on December 28, 1954.The second count alleged a declaration of a dividend and non-payment thereof in 1955. The third count alleged that under the terms of Constantin's amended certificate of incorporation and the preferred stock certificate, Constantin was bound to pay to Arizona out of net profits a fixed yearly dividend of 50› per share, payable semi-annually, and that net profits were available for the payment of such a dividend. Arizona alleged that it demanded payments of the dividends, that payment was refused and that it is entitled to a judgment in the amount of $5,000 plus interest for the dividend declared in 1954 and not paid to Arizona and to a judgment in the amount of $5,000 plus interest for the unpaid dividend which, it is alleged, Constantin was bound to pay in 1955, there being net profits available.

Constantin answered in substance that Arizona was no longer a stockholder and that therefore no dividends were due it; that any alleged accrued but unpaid dividends were due to the present owner of the preferred stock, not Arizona; and, while admitting the declaration of a dividend on December 28, 1954, Constantin denied that any dividend had been declared in 1955, and denied also that any dividends were due in 1955 as a matter of right.

S & C Trading Co., Inc., was permitted to intervene as a party plaintiff on the basis of a contention that as transferee of 10,000 shares of the preferred stock held by Arizona, it was entitled to all dividends and rights to dividends declared and unpaid, or undeclared.*fn5

Arizona moved for pertial summary judgment on the first count of the amended complaint and this motion was granted. In view of the intervention and claim to dividends by S & C Tradeing Co., the court below ordered Constantin to pay the December 1954 dividend of $5,000 plus $504.16 interest into the registry of the court to await the outcome of the action between Arizona and S & C Trading Co.

Pursuant to a stipulation between Arizona and Constitutin, the action based on the second count was dismissed. An examination of the minutes and books of account of Constaintin showed that no dividend was declared or paid to the owners of preferred stock for the calendar year of 1955.

Constantin's motion for summary judgment, or judgment on the pleadings in the alternative, with respect to the third count of the amended complaint, was granted, and Arizona's cross-motion for summary judgment addressed to the third count was denied. The court below handed down no opinion explaining the reasons which caused it to take the action it did on the motions directed to the third count but on the occasion of oral argument on the motions the court expressed the view that "notwithstanding the provision in the certificate of incorporation, a dividend should be payable only when declared in the discretion and judgment of the Board of Directors."*fn6 The clerk was directed to enter a final judgment dismissing the third count with prejudice, the court below expressly determining that there was no just reason for delay in the entering of such a judgment. Rule 54(b), Fed.R.Civ.P., 28 U.S.C.

This appeal relates only to the lower court's determination as to the third count of the amended complaint. As we have indicated this count alleged that Constantin was contractually bound by the provisions of its amended certificate to pay a dividend for 1955, net profits being available.*fn7

Constantin contends that if this court compels the payment of a dividend, absent fraud or bad faith on the part of the Board of Directors, it will be interfering in the management and internal affairs of the corporation; that the compelling of a payment of a dividend would change the status of Arizona from a shareholder to a creditor; and that a suit to compel a declaration of a dividend is a class action and Arizona does not allege that it sues on behalf of other stockholders similarly situated.

Since Arizona's claim is asserted against Constantin, a New Jersey corporation, and is based on the certificate of incorporation granted that corporation under the corporation law of that State, the law of New Jersey must determine the issues before us. Klaxon Co. v. Stentor Elec. Mfg. Co., 1941, 313 U.S. 487, 61 S. Ct. 1020, 85 L. Ed. 1477; Erie R. Co. v. Tompkins, 1938, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188. Does the law of New Jersey support the conclusion that the provisions of the amended certificate of incorporation and the preferred stock ...


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