## Facts

- A New Jersey corporation obtained authorization to do business in New York under New York’s foreign-corporation statutes.
- After qualifying, the corporation maintained its main business office in New York, held regular and most special directors’ meetings in New York, and generally managed and conducted its business there.
- Over a period of years, the directors (including Clarence A. Diehl) declared and paid dividends in New York as part of administering the corporation’s business.
- The dividends were allegedly paid out of capital rather than surplus or net profits, and the directors allegedly knew the dividends were unearned.
- The corporation alleged losses of $239,016.75 from the unlawful dividends and sued Diehl in New York to recover that amount plus interest.
- The complaint also referenced New Jersey’s dividend statute, which similarly barred dividends except from surplus or net profits but generally gave the right to sue to shareholders (unless insolvency), and the corporation did not allege insolvency.

## Issues

1. Whether New York’s director-liability statute for unlawful dividends applies to a foreign corporation doing most of its business in New York for dividends declared and paid in New York.
2. Whether the foreign corporation itself may sue a director in New York for dividends paid out of capital when the incorporation state’s statute would allocate the cause of action to shareholders absent insolvency.

## Decision

- The court held that New York law created an independent cause of action permitting the corporation to sue its director for dividends unlawfully paid out of capital in New York.
- The court concluded that New York’s statutory liabilities for directors regarding unlawful dividends apply to directors of foreign corporations doing business in New York for conduct occurring in New York.
- The certified question was answered in a manner recognizing that the complaint stated a cause of action under New York law, defeating the demurrer’s premise.

## Legal Principles

- A forum state may apply its dividend-regulation and director-liability statutes to foreign corporations authorized to do business in the forum with respect to acts done in the forum.
- New York’s statutory remedy for dividends paid out of capital may be treated as an independent forum-created cause of action, not merely an enforcement of rights granted by the incorporation state.
- Differences between states in who may sue for unlawful dividends (corporation/creditors versus shareholders) may be viewed as remedial, allowing the forum to supply an additional remedy where both states prohibit the underlying conduct.
- A foreign corporation’s admission to transact business in the forum may be conditioned on compliance with the forum’s standards of director responsibility for in-forum corporate administration, including dividend payments.

## Conclusion

The court permitted a New Jersey corporation operating principally in New York to proceed in New York against a director for dividends allegedly paid out of capital in New York, holding that New York’s director-liability statute applied and furnished the corporation an independent in-state remedy notwithstanding New Jersey’s different allocation of the cause of action.


German-American Coffee Co. v. Diehl, 216 N.Y. 57, 109 N.E. 875 (N.Y. 1915)