Berks Broadcasting Co. v.

Craumer, et al
Facts:
-

Craumer and 3 others formed Berks Broadcasting (acs $100k, 1000 shares,
$100 par value)
These four, as directors of Berks, declared and paid a dividend of $4k
Two months after, they decided to sell their stocks to certain parties for
$210k, subject to approval of the Federal Communications Commission
Pending that approval, they, as sellers, would continue in control of Berks
Before the approval of the sale, they further managed to declare and pay
more dividends $4k, $2k, $3k
They declared such dividends on the basis of that years earnings and an
alleged surplus from the previous year
However, on the balance sheet of the corp., there were re-appraisal writeups included (increases in the valuations of fixed assets of the company over
and above the cost of those assets less depreciation) which bloated the
assets and made it appear that there was surplus when in fact, there was a
deficiency
the corporation, now under control of the new shareholders, sued for the
recovery of the unlawfully declared dividends from Craumer, et al

Issue:
w/n the dividends were declared in conformity with the law
Held:
No, the dividends were unlawfully declared. Federal law requires that no dividends
in cash or property be declared and paid except from the surplus of the aggregate
of its assets over the aggregate of its liabilities (including stated capital), after
deducting from the aggregate of its assets the amount by which such aggregate
was increased by unrealized appreciation in value or revaluation.
SURPLUS = [ assets (unrealized appreciation + revaluation )] ( liabilities +
stated capital )
It was proven that there were no surplus from which said dividends could have been
drawn from.
A surplus must be bona fide and not an artificial or fictitious one; it must be founded
upon actual earnings or profits and not be dependent for its existence upon a
theoretical estimate of an appreciation in the value of the companys assets.
Re-appraisals (yung write-ups) of the value of assets, however apparently justified
and accurate for the time being, are subject to market fluctuations, are merely
anticipatory of future profit, and may never be actually realized as an asset of the
company.

Federal law provides that should dividends be made except in conformity with the
law, the directors would be solidarily liable to the corp. in the amount of such
dividends.
EXCEPTION: declaration of stock dividends because creditors and shareholders will
not be affected as they do not decrease the companys assets