MCLARAN vs CRESCENT
117 Mo. App 40, 93sw 819 / Feb 27, 1906 / Nortoni, J./ Duties
of Directors / Dividends
SUMMARY. Corporation declares dividends to be paid in
installments but it doesn’t set apart any funds for the payment
thereof. Later, it rescinds the declaration upon the ground of
overestimating its surplus profits, so it defers payment of the
later installments of the dividends. Stockholder demands full
payment of the dividend but corporation asserts that there was
no valid declaration as no separate funds were set for the
purpose and in any case, payment of the dividends has been
recalled. Court held that the corporation is already bound, like
a debtor, to pay dividends at the moment of declaration, even
without setting aside funds for the same, and that it could no
longer rescind the payment of dividends because it was
already obligated to pay the same.
DOCTRINE. The mere declaration of dividends, when
fairly and properly made out of profits existing at the time
it was declared, automatically creates the relation of
debtor and creditor between the corporation and the
stockholders for the payment of the dividends to the
stockholders. This declaration operates as a severance of
the dividends from the stock in the general mass of the
corporate property, and raises an implied promise on the
part of the corporation to pay the stockholders the amount
of said dividends.
FACTS.
 Crescent Planing Mill Co. is a manufacturing
corporation in St. Louis, Missouri. It had a capital
stock of $50,000, divided into 500 shares each with a
par value of $100.
 Robert J. Humber (the decedent of the estate
administered by herein appellee, McLaran) was one
of its shareholders with 57 paid-up shares. He also
served as its director and president.
 Crescent, through its BOD, declared cash
dividends out of its surplus. The dividend was at a
rate of 6%, divided into 4 installments (1.½ % per
installment).
 Despite this declaration, Crescent did not take any
action to set apart a fund out of which to pay the
dividends. This was also notwithstanding the fact that
it was solvent and had adequate surplus profits
($10,000 undivided profits and $29,000 surplus).
 Humber, during his lifetime, and the other
shareholders were paid the first installment.
However, when the time to pay the second
installment came, Crescent allegedly discovered
that it made an overstatement of its assets in its
financial statement (surplus was actually only
$23,000 because the assets were overstated by
$6,000). Thus, the board resolved in a meeting to
rescind and recall the order to pay out dividends
and to defer the payment of the subsequent
installments indefinitely. At the time, the company
was still perfectly solvent and had ample funds to pay
the dividend.
 Humber demanded payment of his dividend but was
refused on account of the recent action by the board.
Thus, he filed an action for recovery of the alleged
amount.
 Crescent’s defense is two-pronged:
o There was no valid declaration of
dividends because the board failed to set
aside funds for the purpose (in this
argument, Crescent relies on the definition of
authorities of the word “dividend,” ie. profit
set aside, declared and ordered to be
distributed to stockholders); and
o In any case, the earlier declaration had
been superseded by the board action
cancelling the same.
 LC ruled for Humber so Crescent appealed to the CA.
Then, Humber died so McLaran, his counsel, was
appointed as administrator of his estate and continued
to represent him in the instant case.
 In the present case, Crescent basically repeats its
arguments and uses the case of Ford v. East
Hampton to support its claim that the BOD can validly
rescind its declaration of dividends.
ISSUES & RATIO.
1. WON McLaran can recover the amount allegedly due to
Humber as payment of the latter’s dividend – YES.
WRT Crescent’s first defense re: declaration
 Crescent’s argument that for a valid dividend declaration
to be made, there has to be an actual “setting aside” of
funds (refer to the definition of dividends cited by Crescent
in the facts), does not hold water.
 The mere declaration of dividends, when fairly and
properly made out of profits existing at the time it was
declared, automatically creates the relation of debtor
and creditor between the corporation and the
stockholders for the payment of the dividends to the
stockholders. This declaration operates as a severance
of the dividends from the stock in the general mass of
the corporate property, and raises an implied promise
on the part of the corporation to pay the stockholders
the amount of said dividends.
 Thus, for purposes of creating this debtor-creditor
relationship, in which the stockholders for whom the
dividends are declared attain the status of a general
creditor, there is no need to set aside actual funds out
of which payment for the dividends is to be made.
Also, with regard to the definition cited by Crescent to
augment its contention, in which the phrase “set aside” is
used to define dividends, the authorities who made such a
definition should be understood merely to mean that the
mere act of declaring dividends already constitutes a
setting aside of profits, albeit in a constructive manner.
Effect of actual setting aside of funds
 The actual act of setting apart a fund after or
concurrent with the declaration, only serves to
improve the standing of stockholders insofar as their
ability to demand payment for dividends is concerned. This
is because this second step constitutes the money in
such fund as a trust fund in the hands of the corporation
for the use of the stockholders, such that the latter are now
in a better position than a mere general creditor to obtain
payment. Thus, in the event of bankruptcy of the
corporation, the stockholders, in order to get paid the
amount pertaining to their dividends, no longer have to
contend with the other general creditors to get a pro-rata
share out of corporate assets; rather, they can
immediately proceed against the corporation, as the
trustee, on account of such trust fund.
 In other words, mere declaration of dividends makes
the corporation liable. The setting aside of funds for
payment of such dividends is not essential to create
such liability but only serves to improve the capacity
of stockholders to enforce such liability.
WRT Crescent’s second defense re:rescission
 A cash dividend, properly and fairly declared, cannot
be revoked by subsequent action of the corporation;
to countenance such act would be tantamount to
allowing a debtor to unilaterally rescind his obligation
to pay his creditor (note debtor-creditor relationship
explained above). Thus, the BOD resolution to this effect
is of no moment.
 The case cited by Crescent, Ford v. East Hampton, is
inapplicable, because there, the BOD recalled their
declaration before the stockholders were even notified of
the same.

DECISION.
Judgment affirmed.