87 N.J. Eq. 531 | New York Court of Chancery | 1917
The three suits involve the same facts. The difference is as to the nature of the relief prayed. The point at issue is whether the Distilling Company of America (hereafter called “Distilling Company”) may be dissolved by its stockholders without providing for the contingent liability of the corporation upon its guaranties of the payment of dividends upon the preferred stocks of 'the United States Industrial Alcohol Company (hereafter called the “Industrial Companj'”) and the Cuba Distilling Company (hereafter called the “Cuba Company”). Complainant Allen is a preferred stockholder of the Industrial Company. Complainant Industrial Company is a preferred stockholder of the Cuba Company. Complainants Eice and others are preferred stockholders of both the Industrial and Cuba Companies.
The Allen and Industrial bills seek to enjoin the dissolution of the Distilling Company. The Eice bill seeks to inipress upon the assets, after dissolution, a lien or trust for the benefit of the preferred stockholders of the Industrial and Cuba Companies, and to have this court take over the proceedings in dissolution by the appointment of a receiver.
Upon the filing of the bills, orders to show cause were allowed with, ad interim restraint. Motions have been made in the Allen and Industrial suits to strike out the bills upon the ground that they fail to set up facts sufficient to constitute any cause of action in equity or to entitle the complainants to the relief therein prayed for, or to any other relief in the premises. The hearing-has been had upon the orders to show cause and the motions to strike out.
“Now, therefore, for good, valuable and adequate consideration to each of the first and second parties in hand paid, the receipt of which by them respectively is hereby acknowledged, it is hereby agreed as follows:
“1. The first party hereto guarantees to said George and to each and all of the present and future holders of record of all or any part of said preferred stock severally, so long as the same shall be outstanding, during said fifty (50) years, that said Industrial Co. shall and will always during said fifty (50) years have and possess adequate, sufficient and available surplus or net profits out of which to pay, and that said Industrial Co. shall and will promptly pay during said fifty (50) years out of said surplus or net profits said quarterly dividend of one and three-fourths per cent. (1%%), on the said fifteenth days of "January, Aprils July and October in each year during said fifty (50) years, beginning with the year 1907, on all of said preferred stock, so long as the same shall be outstanding during said fifty (50) years, and in case of any default by said Industrial Cq. in making any such payment or payments, on any of said respective dates, the first party hereby guarantees that it shall and will immediately upon such default, pay to the then holder or holders of record of all or any part of said preferred stock, so long as the same shall be outstanding during said fifty (50) years, the amount of such' defaulted payment or payments. It being understood and agreed, however, that to the extent of any and all payments which the first party may make by reason of this guaranty it shall and will be subrogated to all of the rights of said holders of record of said preferred stock to whom the first party has made or may make payment or payments hereunder, and the amount of such payments or payments, together with interest thereon at - the rate of five per cent. (5%) per annum shall, and said Industrial Co. hereby agrees will be promptly repaid to the first party by said Industrial Co. from time to time as soon as said Industrial Co. has surplus or net profits sufficient to make siicli repayment in whole or in part.
“2. This guaranty shall be irrevocable. No voluntary or involuntary dissolution or. merger or consolidation of said Industrial Co. or of the i first party shall, except by and with the written consent of the holders j of record of all of said preferred stock outstanding at the time, release,J discharge, modify or affect said guaranty in any way.”
Oil March 25th, 1907, the Distilling Company entered into a similar contract with the Cuba Company and all of the then present and future holders of its preferred stock.
It will.be at_once pereei.ved .that He same stock ownership as approved the contracts of . guaranty now assert the power to dissolve His..guarantor company wiHout regard to any supposed riglxts„eNthe=guaraiite.e.d_.preferred_ stockholders. The stock of He Securities Company is widely distributed. It is dealt in on the New York stock exchange. The Industrial and Cuba Companies are prosperous operating concerns. The Distilling Company has never yet been called upon to respond to the guarantees. It is a holding corporation having assets of a par, and, concedeály, real, value of approximately $66,000,000.
The preferred stockholders of the Industrial and Cuba Companies cannot be put in stoius quo. The consideration is executed. ^
The issue is:' If A corporation authorized by a provision in\ its charter to guarantee payment of dividends on stock of B corporation, does so guarantee such payment for a period of forty years yet to run, for a valuable consideration, executed, so that the parties cannot be placed in status quo, such contract of guaranty being approved by the stockholders of A corporation, can it be permitted to dissolve and may the holders of the stock of A corporation who have approved the contract of guaranty be permitted to vote such stock in favor of such dissolution, without making some adequate provision, for the contingent lia-1 bility of A corporation to the stockholders of B corporation ? J
Defendants insist that under sections 1, 31, 53, 54 and 58 of the act concerning corporations (Revision of 1896), the Distilling Company may be dissolved by its stockholders and its assets distributed among them after payment of its debts (section 54), and that such contingent liabilities as "are sought to be asserted by the complainants are not debts within the meaning of the statute, and that complainants are not creditors within the meaning of section 58, which provides that the trustees or receivers on. dissolution shall pajr, ratably, so far as the money and property of the corporation shall enable them, all of the creditors who prove their debts in the manner directed by the court, and that the balance, after the payment of such debts, be distributed among stockholders.
Complainants insist that the assets of a corporation are a trust fund to secure the payment of its debts or obligations, certain or contingent, and that it is unjust and inequitable to permit the distribution of this trust fund to stockholders unless adequate provision is first made to take care of the contingent liability to the preferred stockholders of the Cuba and Industrial Companies; that their rights are superior to any rights <rf stockholders; lat the stockholders of the -Distilling Company have by the ■ ns of the contracts of guaranty estopped themselves from taking any- action to dissolve the Distilling Compaiiy without making adequate provision for these contingent obligations; that to permit dissolution in the manner contemplated would be to deprive complainants of any remedy upon the contracts of guaranty. J
The mere statement of the remedy reserved to the preferred stockholders of the Cuba and Industrial Companies proves its total inadequacy. If the assets mUha—Distil ling Company are turned over to the Securities Company, the Securities^Company in turn may be rli'sanlverl nnrl its assets distributed.Umong its stockholders^^idinff-Jn.- nlLparts, of the United States and foreign-canairies. I cannot believe a remedy which would oblige these preferred stockholders, upon a breach of the contracts of guaranty thirty or forty years hence, to follow the assets of the Distilling Company or the stockholders of the Securities Company. wherever they might then be, is in reality any remedy.
It was apparently seriously contended upon the oral argument that because, upon the dissolution of this corporation, its assets will go to'the Securities Company, substantially the single stockholder, it was a mere conversion, and the preferred stockholders, in case of default, might sue the Securities'Company and that the relative rights are not altered. This is not true. The liabilities of the Securities Company are substantially different from those of the Distilling Company. There are no liabilities of the Distilling Company, save those under the contracts of guaranty. The case must be treated precisely as if the corporation, instead of having one stockholder, had twenty thousand. Unless relief can be granted in these cases in some form, a guaranty of a corporation solemnly entered into by ifs directors and
For the purposes of this opinion it may be conceded that it is settled law that in cases of bankruptcy or insolvency or the estates of deceased, claims of this nature may not be asserted, but tire underlying reason for the rule is convenience. Natural justice requires that contingent obligations should be protected as well as certain. It is only because there is no method by which their money worth can be presently ascertained, and because to withhold distribution of assets of insolvents and estates of deceased until such worth could be ascertained would be im-‘ practicable that the courts have been forced to adopt the prevailing rule.
Judge Noyes, in Pennsylvania Steel Co. v. New York City Railway Co. (Circuit Court of Appeals, Second Circuit), 198 Fed. Rep. 721, clearly points this out as does the court in Gay Manufacturing Co. v. Gittings (Circuit Court of Appeals, Fourth Circuit), 53 Fed. Rep. 45; in the latter case the court says:
“This case has been decided as between creditors and persons claiming to be creditors. It was stated at the bar that the property of the Gay Manufacturing Company may realize more than enough to pay the liens and the proved past-due debts. Should this be the result of the sale, there may arise a very different question with regard to this surplus as between the petitioners and the stockholders. No opinion is expressed on this point.”
The case in its facts was very similar to those presented by the bills 'in the cases sub judice. The guaranty there dealt with was of the principal and interest of a bond issue, and, in the present instance, is of dividends on preferred stock. In People v. Metropolitan Surety Co., 205 N. Y. 135; 98 N. E. Rep. 412, the court of appeals of New York, although excluding participation of holders of contingent obligations in assets on a par with creditors holding certain claims, said:
The court modified tire orders below so that they would state that they were without prejudice to the right of claimant to share-in the surplus, if any, after payment of the provable debts at the date of dissolution. I am firmly of the opinion that the rule ought not to be extended further than its reason requires. Holders of this class of contingent obligations have been recognized as creditors (Tod v. Kentucky Union Land Co., 57 Fed. Rep. 47; Marbury v. Kentucky Union Land Co. (Circuit Court of Appeals, Sixth Circuit), 62 Fed. Rep. 335), and entitled to share with other creditors in assets where a method could be devised of ascertaining the money worth of the claim.
There is great force in the argument of' complainants that the legislature never intended to permit a voluntary dissolution of a corporation and the distribution of its assets to stockholders, under the provisions of the statute heretofore referred to, until all of the obligations of the corporation, contingent, or otherwise, should have been adequately provided for and that the terms “debt” and “creditors” used in the sections of the statute dealing with dissolution, include holders of contingent obligations as well as certain, and are synonymous with the words used in, section 107 with respect to merger or consolidation, “debts, liabilities and duties.”
The words “debt” and “creditors,” used in that portion of the Corporation act dealing with insolvency, have been held to have no narrow, restricted or technical meaning. Rosenbaum v. Credit System Co., 61 N. J. Law 543, 548; Spader v. Mural Decoration Manufacturing Co., 47 N. J. Eq. 18; Bolles v. Crescent Drug and Chemical Co., 53 N. J. Eq. 614; Lehigh and Wilkesbarre Co. v. Stevens & Condit Transportation Co., 63 N.
• It maj'' well be, therefore, that in those sections of the act dealing with voluntary dissolution the words “debt” and “creditor” must be held to include holders of contingent obligations, for the rule of necessity does not apply, fóan it be conceived that the legislature ever intended to give avc3rporation.express power to enter into siiclTYOTityacts and at the same time_ give its stocTEtioTdCTS^xpreffi power to, jwheneveTTl^yeíñct, jcrojidtyhe contractNbyjvpluirtary^jiissoIuiifin^leasdn^ndre^etlienqDarties^ to thejcontracts (where Urey have parted with valuable consideration of.which the stockholders have the advantage) to the inadequate remedy of, at some subsequent time, when the contingent liabilities have ripened into certain, suing the dissolved corporation and then following its assets and its stockholders? A corporation might enter into a contract of guaranty to run for twenty years and might receive the sum of $100,000, the next day,' or shortly thereafter, proceedings might be taken to dissolve it, the $100,000 might be distributed among its stockholders and the holders of the guaranty left helpless. The language of Mr. Justice Parker, in Hould v. Squire & Co., 81 N. J. Law 103, 105, is as applicable here as it was to tire caseHhen before"the CMrt. He was dealing with the right of a holder of a contingent obligation to sue a .corporation after dissolution, and, determining that he could, he said:
“To hold otherwise would enable a corporation to defeat valid causes of action for heavy damages by the simple expedient of dissolution and organization of a new corporation taking over the assets of the old one.”
To hold 'that a corporation after entering into contracts of guaranty may be dissolved by its stockholders without regard to the rights of the guaranteed would, in my view, • permit a situation to exist as unjust as that denounced by Mr! Justice Parker. The language of Vice-Chancellor Stevenson, in Hoopes v. Basic Co., supra, with respect to the qualifications a credi
The conclusion which I have reached, however, makes it . unnecessaryYh^a^YpoxW£ENbTOadr^1TeStibh“as'To whether or not, under any circumstances, the stockholders of a corporation which-Jias entered into contingent obligations will be permitted to dissolveA4-jvEImTit..maldug_a.flftqnji.t.fta-pa^viflien for such obligations^ I think the stockholders have effectively estopped themselves from exercising their right under the statute in the manner in which they are now attempting to exercise it. The j contracts of guaranty, stamped upon the back of each of- the certificates of preferred stock, the dividends upon which were I guaranteed, contain this provision:
“This guaranty shall be irrevocable. No voluntary or involuntary dissolution or merger or consolidation of said Industrial Oo. or of the first party shall, except by and with the written consent of the holders of record of all said preferred stock outstanding at the time, release, discharge, modify or affect said guaranty in any way.”
Defendants insist, that this clause indicates that the parties had in contemplation that there might be a voluntary dissolution, that the clause was inserted to avoid what counsel indicated was the law of New York, i. e., that upon voluntary dissolution such a contract would become absolutely null and void so that no relief could be had bjr following assets or proceeding against stockholders—that the intent of the parties was merely to preserve such rights. I cannot believe that, as matter of fact, this was the understanding of the holders of the stock. I have already indicated that such a remedy would be inadequate, and I do not believe that the holders of the guaranteed stock ever assumed that they were receiving such practically worthless ob
There is no wánt ffit" jurisdiction or of power in this court. The court may enjoin a defendant from disenabling himself from performing a continuing contract. Hooper v. Broderick, 9 L. J. Ch. (N. S.) 321; 59 Eng. Reprint 791; DeMattos v. Gibson, 4 De G. & J. 276; 28 L. J. Ch. 165, 498; 45 Eng. Reprint 108; Cockrell v. Warner, 14 Ark. 345; Southern Railway Co. v. Franklin and Pittsylvania Rd. Co., 96 Va. 693; 32 S. E. Rep. 485; 44 L. R. A. 297. Dissolution of corporations has been prevented. Fisk v. Railroad Company, 10 Blatchf. 518; Fed. Cas. 4830, referred to in Louisiana State Lottery Co. v. Fitzpatrick, 3 Wood 222; Fed. Cas. 8541; Kessler v. Continental Construction and Improvement Co., 42 Fed. Rep. 258. While it may be said that these cases are not directly in point, yet they recognize the jurisdiction of a court of equity to enjoin a party from disenabling himself from performing a contract and the power of the court to enjoin the dissolution of a corporation.
Mr. Justice Pitney, in Central Trust Co. of Illinois v. Chicago Auditorium Association, 240 U. S. 581 (at p. 591); 60 L. E. 811, said:
“Commercial credits are, to a large extent, based on the reasonable expectation that pending contracts of acknowledged validity will be performed in due course; and the same principle that entitles the promisee to continued willingness entitles him
And he, therefore, reaches the conclusion that bankruptcy proceedings are an equivalent of an anticipatory breach of a continuing agreement.
A promisee being entitled, as matter of law, to continued willingness and continued ability on the part of the promisor has, upon the promisor’s disenabling himself, an action at law for damages, but he also may go into a court of equity to enjoin the promisor from voluntarily disenabling himself if the remedy at law for the breach-be inadequate, as in these cases. The court is, of course, without power to prevent bankruptcy or insolvency just as it is without power to prevent a man who has deliberately asserted that he intends to commit suicide in order that his estate may be distributed without regard to contingent obligations from carrying out his threat, because its decree would be ineffective. There is no such want of power, however, to prevent a corporation from dissolving if equitable consideration requires that this should be done.
Much confusion has been created by a failure to distinguish between lack of jurisdiction and-lack of power to enforce a decree or order. So long as courts of equity are to serve the purpose of the creation of the court of chancery of England, and in this state the court of chancery, is the successor, in all that such terms implies, of that court, jurisdiction must depend only upon the existence of, or a threatened, wrong, and the absence of an adequate remedy at law. The court has full and complete jurisdiction, if there be no adequate remedy at law, to compel a singer to perform his contract, to compel an inn keeper to keep open an inn, to compel a person to so act as to continue solvent in order to permit the performance of a contract, and cases of like nature. The court will not act, however, directly in such cases because its order or decree would be
Courts have intervened for tire protection of contingent rights. Van Duyne v. Vreeland, 12 N. J. Eq. 142; Flight v. Cook, 2 Ves. Sr. 619; 28 Eng. Reprint 394.
Bijur v. Standard Distilling and Distributing Co., 74 N. J. Eq. 546, presents no obstacle to the granting of relief. In that , case Vice-Chancellor' EiueiwHr^Hlrrt'tiSe'^TOs^.o remaining ' obligaHraTcmThe partmf .th.e,.eom-pa.ny_.t!^]^^^jánd.Kecandly, that the estoppel claimed, which was based on fraud, had notN been-.proven— That .there„is.no precedent.jd-U-not prevent a court.of equity, frjomja£Ünff- Earle v. American Sugar Refining Co., 74 N. J. Eq. 751, where the present chancellor, then vice-chancellor, said the principles of equity will be applied to new cases as they are presented, and relief will not be withheld merely on the ground that no precedent can be found. And he reiterated this in Palmer v. Palmer, 84 N. J. Eq. 550.
The factors in this case which distinguish it from any other brought to my attention are, first, the corporation. wa&nspressly authorized to enter into the contracts: second, the stockholders of tlre-ampm^iiitoi-app$OTied-43íe--contracts; third,jhejcqntracts were for valuable considerations executed and the parties can
I have concluded, therefore, to deny the motions to dismiss the Allen and Industrial Company bills and to enjoin the dissolution of the Distilling Company. This results in making unnecessary and improper any expression of opinion upon the merits of the Rice bill. I am of the opinion, resting upon the jurisdiction of this court’ to enjoin a person from disenabling himself to perform a contract where the remedy at lajv is inadequate, to enjoin a breach of a contract'and to conipel its specific performance where there is no adequate remedy at law, and to protect the rights of cestui que trustents in trust funds, that the dissolution of the corporation may be prevented. ' I am unwilling to say whether I would or would not be inclined to grant relief under the Rice bill if I am wrong in enjoining dissolution. The fact that dissolution has been, enjoined, however, removes from the Rice bill its element of anticipated damage, and no order, therefore, can be made under it. I am sorry for this because I had hoped that all three cases might go to the'-court of erro-rs and appeals at one time. I have asked counsel to devise some plan and both they and I have failed. I have concluded, however, not to dismiss the Rice bill but to postpone consideration of it until such time as the court of errors and appeals may pass upon the Allen and Industrial Company bills, or it is evident that no appeals are to be taken. The orders, therefore, will be in the Allen and Industrial Company cases denying the motions to strike out making the orders to show cause absolute and granting the injunction asked for. In the Rice bill the order will be that consideration of the case be postponed, but that either party may have the right to bring it on or to make such applications as they see fit upon five days’ notice.