## Facts

- Girard Grocery Company, a Pennsylvania corporation, sustained an approximately $1,000,000 post–World War I loss due to declining market prices of its merchandise.
- The company did not adequately recognize the loss in its books and continued valuing inventory at cost despite a substantial decline in market value.
- The directors issued financial statements overstating asset values, obscuring the company’s capital impairment.
- In later years, the company generated profits totaling more than $132,000, but those earnings did not offset the earlier loss or create an actual surplus above liabilities and capital.
- Despite the absence of an actual surplus, the directors declared and paid dividends that, in substance, came from capital rather than surplus or net profits.
- After Girard was adjudicated bankrupt, the bankruptcy trustee filed a bill in equity against the directors to compel repayment of the dividends as wrongfully declared and paid.
- The trial court found the dividends unlawful and ordered the directors to repay them; the directors appealed.

## Issues

1. Whether dividends may be lawfully declared when corporate capital has been impaired and the corporation lacks an actual surplus, even if there are current earnings.
2. Whether directors may be held personally liable in equity, at the suit of a bankruptcy trustee standing for the corporation, to repay dividends paid from capital rather than from surplus or net profits.

## Decision

- The Supreme Court of Pennsylvania affirmed the decree requiring the directors to repay the dividends.
- The court held that the corporation had no lawful surplus because profits did not exceed aggregate liabilities including capital stock, given the prior loss and resulting capital impairment.
- The court treated the dividends as paid out of capital and therefore wrongful.
- The court upheld equitable relief compelling repayment to the corporate estate for the benefit of creditors.

## Legal Principles

- Dividends may be declared only from an actual surplus or net profits, not from capital.
- “Surplus” exists only when the aggregate value of corporate assets exceeds total liabilities, including capital stock.
- Current earnings must first restore any capital deficit before they can constitute distributable surplus.
- Directors who declare dividends without an actual surplus, particularly while misstating asset values or concealing losses, may be personally liable to repay the amounts to the corporation (or its bankruptcy trustee).
- Corporate capital functions as a fund available for creditor protection; directors may not deplete it through dividends when capital is impaired.

## Conclusion

The court held directors personally accountable for dividends declared without an actual surplus where the corporation’s capital remained impaired and its financial condition was obscured by overstated assets, and it affirmed an equitable decree requiring repayment to the bankrupt estate.


Branch v. Kaiser, 140 A. 498 (Pa. 1928)