Guttmann v. Ill. C. R. Co. - 189 F.2d 927 (2d Cir. 1951)

Rule:

Where the directors did not abuse their discretion in withholding dividends on the non-cumulative preferred stock for any past years, no right survived to have those dividends declared, and the directors had no discretion whatever to declare those dividends subsequently. 

Facts:

The defendant's net income each year, from 1937 to 1947, inclusive, exceeded the annual dividend on the non-cumulative preferred stock, but no such dividends for those years were ever declared. Similarly, in each of the years 1948, 1949 and 1950, the net income exceeded the annual dividend on the preferred, but the directors declared a dividend on the preferred for each such year. In 1950, the directors also declared a dividend of $1.50 per share on the common stock. The trial judge found as follows: 'The decision of the directors of the defendant not to declare and pay dividends in any of the years 1937 to 1947, inclusive, was made in the exercise of sound business discretion and judgment by the directors, and in the interests of all the creditors, including the bondholders, and of all the preferred and common stockholders of the defendant, and of the public.' Plaintiff contended (1) that the directors abused their discretion in not declaring dividends on the preferred in the years 1942 to 1947, inclusive; (2) that, even if that is not true, the directors had power to declare those dividends subsequently, and abused their discretion when, without doing so, in 1950, they declared a dividend on the common stock.

Issue:

Could the directors validly declare a dividend on the common stock in 1950 without directing that there should be paid (in addition to preferred dividends on the preferred for that year) alleged arrears of preferred dividends, the amount of which had been earned in 1942-1947 but remained undeclared and unpaid?

Answer:

Yes.

Conclusion:

The court held that the evidence did not establish that defendant's directors abused their discretion in withholding dividends from non-cumulative preferred stock for any of the past years. The court held that where directors did not abuse their discretion in withholding dividends, no right survived to have those dividends declared and that the directors had no discretion to declare those dividends subsequently. The judgment was affirmed.