BERKS BROADCASTING v.
CRAUMER  Present case: Corp (now under control of new
356 Pa. 620 / May 7, 1947 / Stern, J. / CORPO: Source of Dividends
SUMMARY. Craumer, Landis and 2 other incorporated Berks
Broadcasting. Among the assets stated in their book entries
were “write-ups” (increase in the valuation of fixed assets).
Before selling their stocks to other shareholders, they declared
dividends amounting to $13k on the ground that theirs is
surplus as reflected on the balance sheet. New shareholders,
on behalf of Berks, filed this instant case to recover the $13k
alleging that they improperly declared dividends. Court ruled in
their favor. It held that the "write-ups" represented an
unrealized appreciation in value of Berks’ fixed assets,
their inclusion in determining the existence of a surplus
from which dividends might be declared was unlawful.
Having eliminated such from the books, their exists no
justification for the declaration of dividends as there is actually
a deficiency in capital.
DOCTRINE. One of basic principles in Corpo law is capital
of the corporation must not be impaire except as such an
impairment may occur through losses resulting from the
operation of the company's business. It is illegal to declare
and pay dividends from other than a surplus consisting of
an excess in the value of the assets over the aggregate of
the liabilities and the issued capital stock.
FACTS.
 1931: Craumer (with two others) and a certain Landis,
incorporated and organized Berks Broadcasting Co. for
constructing and operating a radio broadcasting station.
o Authorized capital: $100K consisting of 1,000
shares, par value of $100 each
o The stock was issued to the 4 incorporators who
became the directors. The book entries state that:
 the stock was fully paid through cash of $5,000 each;
and
 an asset denominated “Franchise Promotion
Expense” was fixed at $80K.
 Year after: Franchise Promotion Expense was written off
the books and was substituted with:
o $50k as an amount “Due on Unpaid Stock
Subscriptions”
o “write-ups” / increase in the valuation of fixed assets
over and above the cost of assets less depreciation
totalling $30k. (Breakdown: Land – 7K, Buildings – 9k,
Transmitter – 7k, Furniture – 3k, Improvements – 4k)
 $50k unpaid stock subscriptions: reduced to $33.2k
since each of the stockholders paid $4.2k (multiply this
by 4 since 4 stockholders: 16.8k. Reduce with 50k then
you get the 33.2k). The next year, the entry on unpaid
stock subscriptions was substituted with “Good Will
and Promotion Expense”
 1935: Good Will and Promotion Expense was reduced
by $20k so $13.2k nalang while the “write ups”: it was
reduced to $26k.
 1943: balance sheet showed assets in excess of
liabilities and issued capital stock in the amount of
$2.545.94. But the existence of this surplus depended on
the inclusion of assets of the “write-ups” of $26k. If the
$26k were not to be counted, there would be a deficiency
of $23,454.06.
 The directors sold their stock, subject to the approval of
the FCC. 2 months prior to selling their stocks, they
declared and paid a dividend of $4K. While waiting for the
approval of the FCC, they made several dividend
declarations amounting to $13K. After which, the
corporation is now under the control of the new
shareholders.
shareholders) is suing for recovery of the $13k alleging
that they were illegally declared and paid out.
ISSUES & RATIO.
1. WON the dividents were unlawfully declared.– YES.
The "write-ups" of $26k represented an unrealized
appreciation in value of Berks’ fixed assets, their inclusion
in determining the existence of a surplus from which
dividends might be declared was unlawful, and since,
when eliminated, there would be, not a surplus, but a
revealed deficiency in capital, it would follow that the
corporation is now entitled to recover from Craumer et al.
the amount improperly distributed by them as dividends.
 One of basic principles in Corpo law is capital of the
corporation must not be impaire except as such an
impairment may occur through losses resulting from the
operation of the company's business.
 It is illegal to declare and pay dividends from other
than a surplus consisting of an excess in the value of
the assets over the aggregate of the liabilities and the
issued capital stock.
 Purpose: to afford a margin of protection for creditors in
view of the limited liability of the shareholders, and to
protect the interest of the shareholders themselves by
preserving the capital so that the purposes for which the
corporation was formed may be carried out.
 The implementation of the principle is reliant on the
computation of the surplus from which dividends may
be properly declared.
o As such, surplus computed for must be: bona fide
and not fictitious founded on actual earnings and
not dependent upon a theoretical estimate of an
appreciation in the value of the company’s assets
o WHY? Such reappraisals, however apparently
justified and accurate at the time, are subject to
market fluctuations, merely anticipatory of future
profit, and may never be actually realized.
 Business Corpo Law of 1933 Sec 701: "no corporation
shall pay dividends: (1) In cash or property, except from
the surplus of the aggregate of its assets over the
aggregate of its liabilities, including in the latter the amount
of its stated capital, after deducting from such aggregate of
its assets the amount by which such aggregate was
increased by unrealized appreciation in value or
revaluation of fixed assets."
 Sec 707 of said law provides that in case of dividends as
otherwise allowed, the directors under whose
administration the same were made shall be jointly and
severally liable
Defenses interposed:
 Craumer et al rely on Act of July 17, 1935 amended Sec
701 adding the italicized part: “xx after deducting from
such aggregate of its assets the amount by which such
aggregate was increased by unrealized appreciation in
value or revaluation of fixed assets, unless the amount
thereof shall have been transferred to, or included in, its
stated capital."
o They misunderstood what “stated capital” means.
Sec 2 defines stated capital as the sum of the par
value of all shares then issued . . . and such other
amounts as may have been transferred to the stated
 capital account of the corporation whether from the
issue of shares, as a share dividend, or otherwise.”
o Thus, in this case, unless stated capital is increased
to such extent (by issuance of additional stock in that
amt, as by a stock dividend) the amount of unrealized
appreciation or "write-ups" was not to be included
among the assets of the corporation for dividend
purposes.
 Craumer: Even if “write-ups” were reduced, the “Good Will
and Promotion Expense” were restored to the original
“Franchise Promotion Expense would justify the
declaration of dividends worth $13K.
o This assumes that the original value of the franchise
still exists, even thought even though defendants
themselves saw fit from time to time to reduce its
valuation and to substitute it with other items.
o Craumer never attempted to revert it back to this item.
o Moreover, the present record does not disclose the nature or
the terms of the "franchise" which the company acquired, —
whether it was perpetual, limited, or indeterminate; if limited,
it would naturally have to be amortized over its term; if
indeterminate, and subject to revocation at the pleasure of
the Commission which had granted it, proper accounting
would require that it be written off as quickly as possible.
 Craumer: The high price paid for the stock assumes
that such surplus existed.
o Market prices of stocks are dependent on speculation.
The price paid has no relation to the factors which
the law prescribes as determinative in the lawful
declaration of dividends.

DECISION. Craumer et al LIABLE