has been reserved, they are illegal and payment may be enjoined by proper action of the stockholders.

(3) The most common form of illegal dividends is that which impairs the capital stock or which endangers the solvency of the corporation. In a case of this kind it is to some extent a matter of bookkeeping and judgment as to whether a dividend is such as to impair the capital stock or render the company insolvent. If the directors declare a dividend in good faith, after a proper investigation of the financial condition of the company, the courts are not likely to interfere.

A case of illegal dividends comes within the jurisdiction of courts of equity and any stockholder may bring suit therein to enjoin the declaration of a dividend believed by him to be illegal. If the dividend has been declared but not paid, all the stockholders must be joined as parties. An illegal dividend may be rescinded by the directors at any time before its payment.

§ 256. Liability for Illegal Dividends.

In most of the states a liability is imposed upon the directors by statute for any violation of the laws regulating dividends. In some cases offending directors are made liable for any and all debts of the corporation incurred during their term of office. In other cases they are liable only for the amount actually paid out in these illegal dividends. In some states they are not only held liable for the corporate debts, or for restitution in case of dividends illegally declared, but are also guilty of a misdemeanor punishable by fine and imprison

ment.

As a rule, the treasurer is not personally liable in any way for the payment of dividends ordered by the directors unless he knows such dividends to be absolutely fraudulent. In a few states, however, liability for dividends prohibited by statute has been extended by express enactment to the executive officers of the corporation if they consent thereto or concur

therein. In such states, if the treasurer knowing the dividends to be in violation of the statutory provision, nevertheless obeys the instructions of the directors and either pays such dividends or permits them to be paid, he is liable with the directors. There are, it may be said, but few states in which this liability exists.

If the directors of a corporation declare a dividend in violation of its charter or by-law provisions, they may be enjoined from its payment, or if not, would undoubtedly be held liable for any resulting damage to the corporation.

When dividends are declared which impair the capital stock or render the corporation insolvent, they not only subject the directors to liabilities and in some cases penalties, but such illegal dividends may be recovered from the stockholders to whom they were paid. "It is the well determined doctrine of the courts of this country that the capital stock is a fund to be preserved for the benefit of corporate creditors. Hence the rule has been firmly established that where dividends are paid in whole or in part out of the capital stock, corporate creditors being such when the dividend was declared or becoming such at any subsequent time, may to the extent of their claims, if such claims are not otherwise paid, compel the shareholders to whom the dividend has been paid to refund whatever portion of the dividend was taken out of the capital stock. *

"If a dividend has been paid out of the capital stock, the stockholders are conclusively presumed to have known it and are liable to an action for repayment. They cannot claim to hold the position of innocent or bona fide holders."22

§ 257. Treasurer's Liability as to Dividends.

As already said, in some few states the officers are together with the directors liable for dividends paid in violation of statutory provisions. As a rule, however, the declara

23 Cook on Corps., § 548.

tion and payment of dividends is one so entirely within the province and discretion of the board that the treasurer is not held liable for any dividends paid in accordance with the board's directions, unless they should be absolutely fraudulent.

The treasurer usually furnishes to the directors the statement of the corporate accounts and finances which determines whether or no dividends shall be declared. It is his duty to provide an accurate statement and should his presentment be so erroneous or so carelessly compiled as to mislead the directors and cause the declaration and payment of improper dividends, he would have failed in the "due diligence" and reasonable care exacted of the treasurer as an agent of the corporation and would be liable for any resulting loss.

Beyond this the treasurer is also responsible for the proper payment of dividends, not only as to the actual computation of amounts due and the proper drawing of the dividend checks, but for their delivery to the proper persons.23

23 See 252.

PART IV.-NEGOTIABLE INSTRUMENTS.

CHAPTER XXVI.

NATURE AND REQUISITES.'

258. Laws which Govern.

The rules governing negotiable instruments differ in material respects from those applying to other contracts. These rules were originally found in the "Law Merchant," i. e., the common law applying to commercial transactions, but have been re-enacted with numerous local variations and additions in the statutes of every state in the Union. The result of these local differences, together with varying judicial interpretations of many important points, was to render the law governing negotiable instruments complicated and difficult.

These complexities gave rise to what is termed the "Negotiable Instruments Law." This is a code of law compiled for the express purpose of unifying and simplifying the rules governing such instruments. It incorporates all the essential features of the common law as far as they apply to negotiable instruments and has been formally enacted or adopted as the statute law in some thirty states of the Union. In these states the requirements as to negotiable instruments are practically uniform.

1 The sectional references in the text of the present and following chapters of Part IV are to the Negotiable Instruments Law as enacted in New York. In other states in which the Negotiable Instruments Law has been enacted, the substance of the law is the same but the sectional numbers under which it appears vary.

The Negotiable Instruments Law has been adopted in the following states and territories: Arizona, Colorado, Connecticut, District of Columbia, Florida, Idaho, Iowa, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Missouri, Montana, New Jersey, New York, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, Tennessee, Utah, Virginia, Washington, Wisconsin and Wyoming. In 1907 it was also adopted in Illinois, New Mexico and West Virginia.

The benefit arising from uniformity of requirements in the different states on so important a subject as negotiable instruments is obvious and the ultimate adoption of the Negotiable Instruments Law in every state of the Union seems assured.

By the provisions of the Negotiable Instruments Law all other statutory laws regulating negotiable instruments are repealed where it is adopted but the common law still applies as to matters not provided for by the code. (§ 7.) In the states where the Negotiable Instruments Law has not been adopted, the statutes and common law control, the statutes being superior to the common law upon all points of conflict. The present discussion follows in the main the principles laid down in the Negotiable Instruments Law.2

259. What Constitutes a Negotiable Instrument.

A negotiable instrument is an undertaking for the payment of money, of such nature and legal status that its title may be transferred by mere endorsement and delivery or by delivery alone and against which when in the hands of a holder in due course,3 the defenses of an ordinary contract do not prevail. The negotiable instruments most commonly employed in commercial transactions are bills, notes and checks.4

The special features of negotiable instruments to which they owe their utility in commerce and in which they differ from ordinary instruments of agreement are as mentioned above,―(a) the very simple methods of transfer; (b) the untrammelled nature of the rights of enforcement transferred. § 260. (a) Methods of Transfer.

A negotiable instrument, when payable to some specific person or his order, is transferred or negotiated by mere

In the preparation of Part IV of the present volume, Crawford's Annotated Negotiable Instruments Law has been freely used. Mr. Crawford, the author of the work mentioned, is the compilor of the original code which formed the basis of the Negotiable Instruments Law.

8 See $274.

4 See Chaps. XXII and XXIII, "Checks "; Chap. XXIX, "Bills and Notes."