## Facts

- Bush Terminal Company and its wholly owned subsidiary owned substantial waterfront and terminal real estate used in operations.
- The companies initially carried these fixed assets on their books at cost, but in 1919 made a voluntary upward book revaluation reflecting alleged appreciation.
- From 1928 to 1932, the companies declared and paid substantial cash dividends that were supported by the surplus created through the write-up.
- The appreciation supporting the distributions was unrealized; the assets had not been sold and the increased values were accounting entries.
- On an historical-cost basis, liabilities and stated capital would have exceeded total assets during the dividend period.
- In 1933, shortly after the last dividend, the company entered receivership and later underwent reorganization.
- The reorganization trustee sued directors (and executors of deceased directors) to recover the dividends as unlawful distributions.

## Issues

1. Whether New York’s Stock Corporation Law permits cash dividends to be paid from “surplus” created solely by a book write-up of unrealized appreciation in fixed operating assets.
2. If such dividends are unauthorized, whether directors who approved them may be required to restore the amounts distributed.

## Decision

- The Court of Appeals of New York reversed the lower courts’ approval of the dividends.
- The court held that unrealized appreciation in fixed operating assets, reflected only by an internal revaluation, is not lawful surplus available for cash dividends under the Stock Corporation Law.
- Because the dividends lacked statutory authorization, directors who declared them could be compelled to account for and restore the distributions (including estates of deceased directors through their executors).

## Legal Principles

- Statutory “surplus” for dividend purposes must reflect a genuine excess of assets over liabilities and stated capital, not a paper increase based on management valuation.
- Unrealized appreciation in fixed assets used in the business is not equivalent to realized profits and is too contingent to support cash dividends.
- Dividend rules serve capital maintenance and creditor protection; permitting distributions based on revaluation would effectively allow impairment of capital through accounting entries.
- Directors authorizing dividends outside statutory limits face potential liability to repay unauthorized distributions for the benefit of the corporate estate.

## Conclusion

The court held that a corporation may not fund cash dividends from surplus created solely by writing up the unrealized appreciation of fixed operating assets, and it allowed recovery from directors who authorized such unauthorized distributions.


Randall v. Bailey, 288 N.Y. 280, 43 N.E.2d 43 (N.Y. 1942)