182 F. 525 | 4th Cir. | 1910
Lead Opinion
This appeal is from a decree passed by the court below in accordance with the prayer of the complaint, which was in the nature of a bill for specific performance, filed by the ap-pellee Adolph E. Godeffroy, on behalf of himself and of all others in like situation who might join with him, to compel the execution and recordation of an agreement, alleged to. have been provided for und§r the terms of a statute of the state of Maryland, relating to certain securities called preferred stock that had been issued by the appellant’, the only deféndant to the bill so filed.
It appears from the allegations.of the bill: That the appellee Godef-froy is. the holder of 242 shares of the par value of $50 each of the preferred stock of the appellant, a corporation organized under the provisions of the general corporation law of the state of Maryland— applicable to railroads — as found in article 23 of the Code of Public General Laws of that state, adopted in the year 1888, and as included in article 23 of its Code of Public General Laws adopted in the year 1904. • That the Baltimore & Eastern Shore Railroad Company was a Maryland corporation which owned and operated a line of railroad in said state, running from the eastern shore of the Chesapeake Bay to the Atlantic Ocean, and that on the 1st day of July, 1890, it conveyed its franchises/line of railroad, and equipment unto the Atlantic Trust Company, a corporation of the state of New York, as trustee, to secure the payment of the principal and interest of $1,600,000 first mortgage 5 per cent, bonds, bearing even date with said deed of trust, and maturing July 1, <1920. That on April 11, 1891, default Jraving been made in the payment of the interest due on said bonds on the 1st day of January, 1891, the Scranton Steel Company filed a bill in the Circuit Court' of the United States for the District of Maryland ■»qgR'in,st §:aid railroad company, and that by said court a receiver was appointed who operated the road until August 31, 1891. That, pending the receivership ¡the bonds of the railroad company, then outstanding, were'deposited with said trustee, subject to the control of a bondholders’ committee, under an agreement that the bonds should be entitled to receive an equal pa,rt of the proceeds of any sale or other, disposition of the property. That said committee made' an agreement with one John E. Searles, representing himself and associates, to reorganize the finances and affairs of said railroad as follows, viz.: The mortgage to be foreclosed and the property and franchises bought in at the sale, the road then to be consolidated with certain lines owned by the Eastern Steamboat Company of Baltimore City, the Maryland Steamboat Company of'Baltimore City, and the'Choptaiik'Steamboat
“Resolved: (1) That we, tlie holders of every share of preferred stock of the Baltimore, Chesapeake and Atlantic Railway Company, do hereby consent to the execution and delivery of the mortgage submitted to us, with the full understanding that the same is and shall be a first lien upon all property of the Baltimore, Chesapeake and Atlantic Railway' Company now held by it, or hereafter to be acquired. And resolved: (2) That we do agree that in each certificate of preferred stock now or hereafter issued there shall be stamped or inserted, substantially the following words, ‘This stock is subject-only to the prior lien of a mortgage dated the first day of September, 189¾ executed to secure twelve hundred and fifty, one thousand dollar, first mort-gáge five per cent, gold bonds, and the renewals and extensions thereof.’ Arid resolved: (3) That in testimony of our consent and agreement thereto, we do as individual holders of said stock, sign this resolution as spread upon" the minutes of the meeting.”
That each and all of the holders and owners of said preferred stock did in fact subscribe to that resolution, and did subject the lien of their preferred stock, then existing upon the property and franchises of the defendant to a prior lien in favor of said mortgage, dated September 1, 1894, securing the $1,250,000, first mortgage 5 per cent, gold bonds, and the renewals and extensions thereof. That the directors of defendant corporation at a meeting held on said 31st day of August, 1894, as they were all authorized to do by the owners of the common or capital stock, prescribed the form of the certificates for the preferred stock in which it was recited that said stock was entitled to preference and priority over the capital stock to semiannual dividends to be paid out of the net profits of the company at the rate of 5 per centum per annum; such dividends to be cumulative, and the stock to be entitled to no other share of the profits, the holders of the
The bill then charges that the defendant, has neither filed such agreement, nor has it caused the same to be executed under its seal and acknowledged in the manner provided for, but that in fact no agreement or certificate of the issue of said preferred stock has ever been made and recorded; that complainant relied upon the fact that such stock had been issued in pursuance of the understanding mentioned, and believed that all things necessary to the valid and proper issue thereof had been done by the defendant, and did not in fact know that all such steps had not been taken until during the month of May, 1908, when by accident he discovered that the defendant had failed to execute and record the certificate or agreement required by
Complainant avers: That it is not true that the lien given by law to the preferred stock was waived in favor of all subsequent creditors, secured and unsecured, and insists that the original takers of that stock did not waive their right to have the same constitute a lien upon said franchises and property, and have priority over all subsequently created mortgages and other incumbrances, but that they waived the first lien to which they were entitled upqn the franchises and property mentioned only in favor of the lien of the mortgage or deed of trust securing the first mortgage 5 per cent, gold bonds, dated September 1, 1894, and the renewals thereof, but in favor of no other lien or credits, whether secured or unsecured. That the claim by defendant that it was not agreed that a lien should be given to the preferred' stock is untrue, and that defendant not only intended to issue that stock in pursuance of said section 294, but also recognized the existence-of the lien'accorded to it by that section, and required that it be waived in favor of the lien of the mortgage securing the bonds referred to, and caused such waiver to be noted upon the stock certificates in the words before mentioned. That defendant is guilty of a gross fraud upon the rights of complainant and the other owners of said preferred stock for the following reasons: First, because defendant’s conduct constitutes a breach of the contract between it and the takers and owners of said stock; second, because having resolved to issue said stock, and having in fact issued it in the manner mentioned, it became the duty of the defendant to execute and record said agreement in discharge of its duty under the laws of the state of Maryland, as well as its duty to the takers and owners of the stock; third, because the said stock was issued upon the express and implied representations and agreement mentioned, which were relied upon by complainant and other takers and owners thereof, as constituting a lien upon the franchises and property of the defendant, having the priority before described.
Complainant insists that a court of equity has adequate power to require the defendant to do all such things as are necessary to the perfect and lawful issue of said preferred stock, and to that end to require it to perform the said contract relating to the stock, and to execute and record the agreement as provided for by said statute.
Defendant, further answering, denied that it was or is bound to issue any other or different stock either preferred or common than the stock it agreed to issue as mentioned in the resolutions of its di
On the 5th day of February, 1909, on the petition of Dwight B. Mallory and nine others, holding together 1,094 shares of said preferred stock, an order was entered in this cause by the court below, making them parties complainant thereto, as if they had been named in the original bill.
The special examiner proceeded to take the depositions of a number of witnesses tendered by complainants, which were in due time certified to and filed in the court below.
The defendant took no depositions, and, the cause having been submitted by complainants for final decree, insisted that the allegations of the bill had not been sustained by the proof offered, and also that the record clearly disclosed that the court was asked to dispose of a controversy in which it was apparent that there was a defect of parties; the common stockholders as such not having been brought before the court and not having been given an opportunity to protect their interests. The court below, not being impressed by these suggestions, entered a decree in favor of complainants, fully sustaining their contentions, and requiring the defendant to comply with the prayers of the bill. From this decree the appeal now to be disposed of was allowed.
There are a number of assignments of error; but the only one in fact insisted on by counsel for appellant, and the sole one we will consider, is that which assigns that the court below erred in entering the decree complained of when the holders of the common stock of the defendant company were not as such before it. We have with a minuteness not usually found necessary stated all of the averments and admissions found in the pleadings, from which the necessity for the rule which impels the conclusion we reach is shown. The question involved is one of practice, and it is not intended by our judgment to decree whether or not, if the court below, by its record, had been in condition to finally pass upon the questions of fact disposed of by it, it erred in entering the decree it did, on the testimony submitted to it. We do not now consider the testimony; we pass upon no questions involving the facts of this controversy. The evidence may not be changed, by the bringing of additional parties before the court, and the final decree herein may be, so far as these facts are concerned, based on the record now before us; but we are not to presume that such will be the case, and we find it to be our duty to see that the parties whose interests are disposed of by the decree complained of are given an opportunity to be heard on the issues joined in this litigation. It is a question that may be of vital importance in controversies of this character. We hesitate to affirm a decree that adjudicates matters relating to the value of the common stock of the appellant corporation, when the holders of that stock (none of them) were not given a day in court. The decree appealed from declared that the preferred stock was validly issued, and that it is entitled to a perpetual dividend
“It is true that, generally speaking, a corporation is the proper representative of all of its stockholders in a suit in which the relief sought will affect each and .all of them in the same way and to the same degree. In one sense all of the stockholders are the corporation, and the corporate body, as a legal entity, may be intrusted with the defense of those rights which are common to all. Obviously, the very -foundation of this rule is a community of interest, with respect of the object of the suit, between the corporation and all of its stockholders. But where the gravamen of the complaint consists of a vital conflict of interest between the corporation and one or more of its stockholders, or between different stockholders, or classes of stockholders, the reason for 'the rule concerning the representative character of the cor-; poration ceases.”
Relating to this question, Judge Lurton, in Taylor v. Southern Pacific Railway Co., 122 Fed. (C. C.) 147, 153, said:
“TEe second ground for maintaining that the Union Pacific Railroad Company is a party by representation is based upon the very obvious rule that the corporation represents its shareholders in the defense of all suits which involve corporate rights or functions. But this principle only applies where.the matter litigated is a corporate matter, as distinct from a right which pertains only to one in his character as the owner and holder of particular shares. What right has the Southern Pacific Company to conclude or affect the right of any shareholder in respect of the ownership or incidents of his particular shares? Of what interest is it to the corporation, con-*535 sidcred. as am entity or as a body of stockholders, whether particular shares are owned or voted by A., rather than B., or whether C. is capable of holding or voting shares at all? It is a question which may indirectly affect other shareholders; but it is clearly not a question which concerns the corporation, as such, or any of its functions. But it has been urged that the idea of a corporation as a legal entity separate and apart from the body of persons composing its stockholders is a fiction which should be ignored whenever used for purposes not within the intent of the device, and that in a case like this a suit against the corporation should be regarded as a suit against every corporator, and therefore a suit to which the Union Pacific Railroad Company is a party by representation. If the issue made with the Union Pacific Railroad Company in its character as stockholder of the Southern Pacific was one which was common to all the stockholders, there would be some room for regarding the litigation as involving a corporate matter, interest, or function. But the question made is one which does not apply to the stockholders as a body. Its solution depends absolutely upon a state of facts peculiar to the particular stockholder, and its decision will affect directly the property rights of that owner alone, and does not directly concern any other stockholder as such. A judgment or decree against a corporation in respect to corporate matters necessarily binds its members, in the absence of fraud, because, as stated by Fuller, O. X, in Hawkins v. Glenn, 131 TJ. S. 319, 332 [9 Sup. Ot. 739, 743 (33 L. Ed. 184)], ‘this is involved in the contract created in becoming a stockholder.’ No such reason exists when the judgment or decree against the corporation does not involve some corporate duty, obligation, or function, but affects alone the contract rights of a particnlat stockholder, as against the other members of the corporation. The shares of stock which it is sought to disfranchise are the corporate property of the Union Pacific Railroad Company. The corporation itself is therefore an indispensable party to any suit which affects its corporate rights to own, hold, or vote such shares, for any decree made with reference to shares so owned must be effective to operate upon the owners. St. Louis Ry. Co. v. Wilson, 114 U. S. 60, 62 [5 Sup. Ct. 738, 29 L. Ed. 661; Swan Land & Cattle Co. v. Frank, 148 U. S. 603, 610, 611 [13 Sup. Ct. 691, 37 L. Ed. 577].”
In City of Wheeling v. Mayor and City Council of Baltimore et al., 1 Hughes, 90, 95, Fed. Cas. No. 17,502, a controversy existed between the said city and other owners of the stock of the Baltimore & Ohio Railroad Company, and the mayor and city council of Baltimore also holders of said stock, the question being whether stock into which certificates of indebtedness issued by that company had been converted had a right to vote in the election of directors, and the city of Wheeling controverting such right and the mayor and city council of Baltimore insisting upon it. The railroad company filed no answer, and when the case came on to be heard the court held:
“And inasmuch.as the facts of the case show that there are three classes of stockholders in the Baltimore & Ohio Railroad Company, whose interests in reference to this controversy are in conflict, there is wisdom in the course pursued by the president and directors of the company. They could not with propriety take sides with either class of stockholders. For this reason, if for none other, the private stockholders should he permitted to file a bill in their own. name, to have this controversy (between themselves and the other stockholders of the company finally decided, and to obtain such relief in the premises to which they may .show themselves entitled.”
Reaching the conclusion we do, that the holders of the common stock — one or more of such stockholders — should have been joined with the defendant below, and finding as we do that the decree complained of materially involves the interests of such shareholders, it follows, because 'Of the well-established rule that no court can determine as to the rights of any party not before it, either actually or con
We are unable to agree with the court below that the appellees did not ask for a decree in derogation of the interests of the common, stockholders of the company. While it is true that by the bill the attempt is made to show that the corporation agreed soon after it was organized to execute an agreement guaranteeing certain rights to the purchasers of the preferred stock, which claim is sustained by the decree, surely it must be admitted that such adjudication in favor of complainants greatly increases the value of the preferred stock, and by so doing materially decreases the value of the common stock as it has been held since it was issued in the year 1894. Most undoubtedly if the corporation did, with the assent of all its stockholders, agree to make and record the agreement referred to, it should be required to do so; but, before such requirement is made, all parties interested in the matters pertaining to it, and! especially those whose stock will likely be seriously affected by it, should by the principle of due process of law be made parties to the litigation by virtue of which such requirement is decreed.
The decree appealed from will be reversed, and the cause will be remanded, with permission to the appellees to make the common stockholders of the appellant — or some proper representatives of them —joint defendants with the defendant below, with the further direction that if the complainant below declines or neglects so to do that the bill be dismissed.
Reversed.
Dissenting Opinion
(dissenting). I am strongly of the opinion that the decree of the Circuit Court should be affirmed.
. It is beyond question, in my judgment, that all the proceedings under which the preferred stock in this case was issued contemplated that the holders thereof should have and possess a lien on the assets of the company. All of the proceedings recited in the record bear witness to this.
In the agreement entered into between the Bondholders’ Committee of the' Baltimore & Eastern Shore Railroad Company and Mr. John E. Searles, found on page 93 et seq. of the record, the first paragraph of the agreement proper is as follows:
“Eirst. The party of the second part undertakes and agrees to purchase and acquire the properties of the Baltimore and Eastern Shore Railroad Company and the Choptank Steamboat Company and to consolidate the same with the properties of the Maryland Steamboat Company and the Eastern Shore-Steamboat Company and for that purpose to organize a corporation under the laws-of: the state of Maryland to acquire and take over and operate all of said properties to be consolidated thereunder. The corporation so to be..formed shall have $1,000,000 of common stock and shall have an issue*537 of .$1,500.000 of cumulative five per cent, preferred stock and shall issue .$1,-250,000 forty year five per cent, gold bonds secured by a mortgage of all Its franchises and property, the lien of which shall he arranged to he superior to that of the preferred stoeh.” (Italics mine.)
It is to be observed that the agreement provided for the formation of a corporation under the laws of the state of Maryland, and that said corporation should have “an issue of $1,500,000 of cumulative five per cent: preferred stock.” The certificate of incorporation of the Baltimore, Chesapeake & Atlantic Railway Company, organized in accordance with this agreement, is found on pages 18 and 19 of the record, and simply provides for a capital stock of $1,000,000.
This stock was issued to Nicholas P. Bond and associates in part payment for property valued at $3,500,000 sold to the company by said Bond and associates, and said Bond and associates offered to take for the balance due them “either $1,500,000 of the 5 per cent, mortgage bonds, at par, or an equal amount of a preferred stock entitled to a cumulative preference of 5 per cent, out of the profits of the corporation.” (Record, p. 165.)
When this offer was made at the meeting of stockholders held on 3d of August, 1894, the following resolution was offered and unanimously adopted (Record, pp. 165, 166):
“Resolved that having considered the proposition made by Nicholas I’. Bond to receive in full payment of the balance due, either one million, five hundred thousand dollars in five per cent, bonds of this company at par, or one million five hundred thousand dollars in five per cent, cumulative preferred stock at par; and being advised that this company has power to make and issue bonds in such amount or amounts as it may deem expedient, and that it has power to issue preferred stock in place of issuing the said bonds,
“Resolved that this company do issue to Nicholas P. Bond in full payment of purchase money due him, one million five hundred thousand dollars of cumulative five per cent, preferred stock, and that certificates therefor be drawn in such form as shall be approved by counsel of this company and accepted by the board of directors.”
That the stock thus provided for was intended to be issued and was issued under the provisions of existing law, and was understood to have and did have a lien upon the property of the corporation, I think is abundantly shown by the facts: First, that at a meeting of the stockholders held on the following day (September 1, 1894) it was thought necessary to get the unanimous consent of the holders of every share of preferred stock, to the execution and delivery of “the mortgage submitted to us, with the full understanding that the same is and shall be a first lien on all the property of the Baltimore, Chesapeake & Atlantic Railway Company now held by it or hereafter to be acquired”; and, second, that it was thought necessary to get like unanimous consent to the following resolution:
“Resolved (2) that we do agree that in each certificate of preferred stock now or hereafter issued there shall be stamped or inserted substantially the following words: ‘This stock is subject only to the prior lien of a mortgage dated this first day of September, 1894, executed to secure twelve hundred and fifty, one thousand dollar, first mortgage five per cent, gold bonds, and the renewals and extensions thereof.’ ”
What do these provisions mean if they do not mean that the agreement made by the common stockholders contemplated that this pre
These questions invite an examination of the statute of Maryland in, force at the time, applicable to the issue of preferred stock “in: place of bonds” by_a company all of whose authorized capital stock was then issued and outstanding.
This stock was issued under the provisions of section 408 of article 23 of the Maryland Code. This must be true because, having all of its authorized capital stock already issued and outstanding, it was only by virtue of that provision that the company had any authority to issue additional stock of any description, and the stock so issued had to be of the description mentioned in that section. One of the attributes of the stock therein provided for is that:
“Tlie said preferred stock shall be and constitute a lien on the franchises and property of such corporation, and have priority over any subsequently created mortgage or other incumbrance.”
In the light of this provision, and in view of the fact that this stock was authorized on August 31, 1894, the necessity for the agreement of September 1, 1894, by these stockholders to subordinate their lien to that of the $1,350,000 mortgage of that date, becomes readily understood. But for that agreement the lien of the stock would have had priority over that of the mortgage as to any one with notice.
And here we come to the only purpose and use of the provision in the Maryland statute for the execution, acknowledgment, and recordation of the corporate agreement under seal therein provided for. As against the corporation and all its common stockholders the agreement and the issue of the stock affords all the remedy needed; but as against subsequent .lien creditors this provision of the law is important to be carried out, and that was the purpose of this bill.
That the failure to acknowledge and record the agreement provided for in the Maryland law was either the result of an oversight or of barefaced treachery will not admit of a doubt. That stock carrying a lien only inferior to that of the $1,350,000 of first mortgage bonds was the consideration for which the company was to receive, and did receive, the property of the Baltimore & Eastern Shore Railroad Company and the Choptank Steamboat Company, valued at $2,500,-000, is shown by the original agreement for the consolidation (page 94, Record),‘as well as by the actual steps taken thereafter by the company when organized.
If I am correct in my strong conviction that all the evidence in the case shows that the contract for the issue of this preferred stock contemplated stock clothed with all the attributes of the Maryland statutory preferred stock, then I cannot see how the presence in this suit' of any common stockholders is eith,er necessary, or indeed even proper. The action of the company in whatever it did agree to do was corporate action, assented to by the holder of every corporate
The fact is that this statutory so-called preferred stock is entirely governed by the statute, and the holders of it occupy, in some aspects, the relation-of creditors of the corporation.
In the case of Heller v. Marine Bank, 89 Md. 602, 43 Atl. 800, 45 L. R. A. 438, 73 Am. St. Rep. 218, Chief Judge McSherry, discussing the changes introduced by the amendment of 1880 (Acts 1880, c. 474), declares that the new law had radically changed what had formerly been described as “preferred stock” under the statute of 1868 (Acts 1868, c. 471), and had clothed it with different attributes. He says:
“Preferred stock, under the act of 1868, had no lien whatever; this statutory preferred stock under the act of 1880, ‘the said preferred stock,’ has a lien on the franchises and property; preferred stock under the act of 1868 had no priority over creditors; this statutory preferred stock, under the act of 1880, has priority over subsequent mortgages and incumbrances.”
See section 417 C, Clark & Marshall on Private Corporations, in which this statute is discussed as well as the case of Heller v. Marine Bank. The authors conclude:
“Such stock is not ordinary preferred stock, nor, technically, is it preferred stock at all, and, therefore, it is not governed by the ordinary rules. It is sui generis, and the rights of the holders are determined by the statute.”
On this branch of the subject 1 cannot do better than to quote from the opinion of the learned judge of the Circuit Court:
“The stockholders are constructively here when the corporation is here in court. It is not attempted to have the court decree in derogation of their rights, but it is attempted to decree that the corporation did agree and was bound at the inception of its existence to execute an agreement under seal and duly acknowledged guaranteeing certain rights to purchasers of or subscribers to such preferred stock. Statutory preferred stockholders are entitled to this muniment of title because, under the Maryland statute, it is made the duty of every corporation issuing preferred stock under the provisions of the statute to execute it, and the failure of a corporation to furnish it is a failure of the corporation to do what the law enacts it shall do.
‘There may be issues of preferred stock to which this provision of this law is not applicable. But that is in derogation of rights given by the statute, and it must be made to appear that such was the agreement of the parties; but in this case, on the contrary, all the evidence tends to show that in the inception of this corporation it was the intention and design of the parties who promoted it that they should buy the property and should pay for it by the issue of mortgage bonds or preferred stock and by the issue of common stock, so that it was part of the original intention of the parties promoting the organization of this company that this preferred stock in lieu of so much of mortgage bonds should issue, and it was to be issued in conformity with the law given by section 408 of article 23.”