Philadelphia v. Philadelphia Transportation Co., Appellant.
Supreme Court of Pennsylvania
October 18, 1956
386 Pa. 231
I dissent.
Philadelphia v. Philadelphia Transportation Co., Appellant.
Hamilton C. Connor, Jr., with him Peter Platten, Allen Hunter White, and Ballard, Spahr, Andrews & Ingersoll, for appellants.
David Berger, City Solicitor, with him William D. Valente and Jacob J. Siegal, Assistant City Solicitors,
OPINION BY MR. CHIEF JUSTICE HORACE STERN, October 18, 1956:
This is an appeal from the grant of a preliminary injunction restraining the payment of a dividend to its stockholders by the Philadelphia Transportation Company.
The dividend in question--one of thirty cents on each share of the common stock of the Company, payable October 1, 1956,--was declared by the Board of Directors on August 28, 1956. The action thus taken was over the objection of the City‘s members of the Board, who contended that the dividend was illegal in that it impaired the capital of the Company.
The City of Philadelphia, the Mayor of the City, and the City‘s representatives on the Company‘s Board of Directors, brought the present action in equity to restrain the payment of the dividend. Their complaint alleged that the aggregate of the Company‘s assets did not exceed $50,000,000, that its liabilities exceeded $68,000,000, that its capital stock exceeded $26,000,000, that its capital deficit was therefore not less than $44,000,000, and that there was no earned surplus from which a dividend might lawfully be paid. It was averred that unless the payment were restrained by the court the damage to the City of Philadelphia would be irreparable. On plaintiffs’ motion the court, on September 13, 1956, enjoined defendant, until further order, from paying the proposed dividend, and directed that a further hearing should be had on September 18. Meanwhile defendant filed preliminary objections to the complaint and also a motion to dismiss the preliminary injunction. The scheduled hearing began on September 18 as ordered, during the course of which the
The law governing the question of the legality or illegality of the declaration and payment of a dividend by a corporation is firmly established by both statutory and decisional law. The
As far as the present appeal is concerned, it has been stated over and over again that on an appeal from a decree awarding a preliminary injunction the Supreme Court will consider only whether any apparently reasonable grounds for the action of the court below existed, and the decree will be affirmed unless the record presents palpable legal error.1
This brings us to the principal contention of the defendant, namely, that the court below erred in the granting of the injunction because the averments of the complaint did not establish that the City of Philadelphia had the legal status or was such a party in interest as to entitle it to contest the payment of the dividend. The court, in a well considered opinion, decided to the contrary, and, in our opinion correctly. It is not necessary to discuss in detail all the provisions in the agreement of July 1, 1907, between the City and the Company‘s predecessor2 which gave to the former extensive rights in the management and control of the Company and covered various other aspects of their relations. Suffice it to say that the City, under the terms
However, most important of all on this question is the provision of the agreement between the City and the Company which gives to the City the right to purchase all the Company‘s property upon any first day of July thereafter upon payment of an amount equal to the sum of the face amount, or call price if any, and accrued interest of all then outstanding bonds, and all then outstanding prior lien bonds, mortgages and ground rents on the Company‘s property plus the par value of all its then outstanding preferred stock and an amount equal to ten (10) dollars per share for all its then outstanding common stock and the amount of its then undistributed corporate surplus, if any, this right to cover the entire transportation system and property, leaseholds and franchises of the Company at the time the City exercises the option. Thus it will be seen that an illegal disposal of any part of the Company‘s property, which includes, of course, its cash assets, would correspondingly diminish the value of the property at the time when the option might be exercised. The Company argues that if the present proposed dividend is being paid from an earned surplus the City‘s interest would not be harmed thereby since the cost of exercising the option would be reduced in exactly the same amount as that of the dividend paid out; however, if the contention of the City proves correct there is no undistributed surplus and therefore any
The Company argues that, if the City‘s allegations are correct as to the comparatively small value of the Company‘s assets, the option would be of no real economic value to the City and would probably, therefore, never be exercised by it, but the City may sometime choose to exercise it for reasons entirely apart from the economic standpoint but which it may consider to be in the best interest of its citizens, and its right so to do cannot be defeated. And, finally, the Company contends that, even if the value of the City‘s option be improperly impaired, it may acquire the Company‘s property by condemnation, but this also is an untenable argument since the price to be paid for the property according to the option is determinable by a fixed formula whereas a condemnation proceeding must depend upon the uncertain decision of a fact-finding tribunal as to the value of the property then being acquired.
In conclusion, it is to be borne in mind that the facts averred in the complaint must, at this stage of the proceedings, be taken as true while the ultimate determination of the issue will depend upon the findings of the court below based upon the testimony to be presented by the parties in support of their respective contentions as to the value of the Company‘s assets.
DISSENTING OPINION BY MR. JUSTICE BELL:
I believe it would be beneficial to all parties in interest, if the difficult and highly technical issue of insolvency were threshed out and quickly decided, but I am forced to agree with the defendants’ contention that the City at the present time has no standing to enjoin the payment of a dividend.
The City filed a complaint against the Philadelphia Transportation Company to enjoin the Company from paying a regular quarterly dividend of 30 cents a share to its 24,000 stockholders.
The principal ground on which the City relies for an injunction was its averment that the Company‘s assets total $50,000,000. instead of $102,000,000., as set forth in the Company‘s latest balance sheet, with the result that the Company has a capital deficit of $44,000,000. instead of an earned surplus; and consequently a dividend cannot be paid when the Company is hopelessly insolvent. These charges, if made by a plaintiff who had a legal status to bring the suit and proved by clear and convincing evidence, would justify a Chancellor in issuing an injunction.
The Chancellor issued a preliminary injunction against the payment of the proposed dividend, and subsequently dismissed defendants’ preliminary objections and their motion to dissolve the preliminary injunction.
On September 20, 1956, pursuant to the Court‘s directions, plaintiffs proceeded to present evidence to support the allegations of their complaint. That afternoon, defendants, without giving plaintiffs an oppor-
In Lindenfelser v. Lindenfelser, 385 Pa., supra, the Court said (p. 343): “Our uniform rule is that, on an appeal from a decree which refuses, grants or continues a preliminary injunction, we will look only to see if there were any apparently reasonable grounds for the action of the court below, and we will not further consider the merits of the case or pass upon the reasons for or against such action, unless it is plain that no such grounds existed or that the rules of law relied on are palpably wrong or clearly inapplicable: Commonwealth v. Katz, 281 Pa. 287, 288, 126 A. 765; Lesher v. Thomas S. Cassner Co., 285 Pa. 43, 44, 131 A. 657; Murray v. Hill, 359 Pa. 540, 541, 59 A. 2d 877; Cohen et al. v. A. M. Byers Company et al., 363 Pa. 618, 619, 70 A. 2d 837.”
A dividend may lawfully be paid only out of net profits or earned surplus: Gillingham v. Gillingham & Son Co., 260 Pa. 559, 103 A. 991; Branch v. Kaiser, 291 Pa. 543, 140 A. 498; Pennsylvania Knitting Mills v. Bayard, 287 Pa. 216, 134 A. 397;
The general rule is well established that the Board of Directors have the right and power to determine
In order to determine whether the Chancellor had reasonable grounds to issue and continue the preliminary injunction, and whether the City has a legal status to bring a complaint in equity to enjoin the payment by the Philadelphia Transportation Company of a regular dividend of thirty cents, it is necessary to ferret out the facts which are somewhat hidden by the smog which has unfortunately enveloped this case.
The City of Philadelphia (a) had entered into an agreement in 1907 with defendants’ predecessor company, and (b) had also executed with defendants several leases of certain City facilities, namely, the Frankford Elevated, the Bustleton Surface Line and the Broad Street Subway. Two of the leases will expire in the near future, and the City has demanded that these leases be extended at the present rental, or that the Company sell all its assets to the City at the price fixed by the City. The Company, on the other hand, has refused to sell its assets for a price which it alleges is grossly inadequate and unfair, and has indicated that it will not agree in a new lease to pay the rental which it is paying under the present leases. Thereupon the City suddenly instituted the present proceeding to enjoin the payment of a 30 cents dividend, alleging that the Company‘s capital is impaired by at least $44,000,000. Everyone must immediately wonder why the City, which for years has been thoroughly familiar with the Company‘s affairs, has suddenly found the Company to be greatly insolvent and why the City would wish to
In the light of the averments in plaintiffs’ complaint and the effort of the City to prove that there was a large capital impairment and no net profits or earned surplus out of which to pay dividends, this Court certainly could not say, as appellants ask us to do, that the Court below did not have reasonable grounds for issuing a preliminary injunction--unless plaintiffs had no standing or status to file the present complaint.
CITY‘S RIGHTS AND STATUS UNDER ITS OPTION
It is important to note that this is not a stockholders’ suit, or an action arising out of a partnership or joint ownership, or a suit by the Commonwealth, or by a receiver, or by a trustee in bankruptcy. This Court has expressly and specifically decided that the City and the Company are not and cannot become partners, and that the City is not liable for any of the debts, obligations or liabilities of the Company, nor is it entitled to become a joint owner or a stockholder of the Company: Brode v. Philadelphia, 230 Pa. 434, 453, 79 A. 659 (1911).
Appellees correctly state that “Plaintiff-City and Defendant-Company occupy a unique relationship to each other;” and that the City has a substantial interest in the Company‘s financial affairs. Although the City is granted many important and very unusual rights under the 1907 Agreement, it is strikingly noteworthy that it is given no rights with respect to the payment, omission or veto of a dividend. The City‘s only right (under the Agreement) with respect to dividends is a
What then are the City‘s rights under its option? In order to determine whether the City has any legal standing and equity under its option of purchase--which it has never exercised--it is necessary, of course, to analyze the option. The option is set forth in paragraph Eleventh of the 1907 Agreement and reads as follows:
“The City reserves the right to purchase all the property, leaseholds and franchises of the Company and its wholly-owned subsidiaries upon any first day of July hereafter, by serving six months’ notice on the Company of its intention so to do and upon paying to the Company upon the date named in said notice, an amount equal to the sum of the face amount, or call price if any, and accrued interest of all then outstanding bonds of, and all then outstanding prior lien bonds, mortgages and ground rents on the property of, Company and its wholly-owned subsidiaries, plus the par value of all then outstanding preferred stock of Company, and an amount equal to ten (10) dollars per share for all then outstanding common stock of Company, and the amount of the then undistributed corporate surplus, if any, of Company.”
Prior to any exercise of the option by the City, the optionee has no interest, legal or equitable, in or to the property subject to the option: Helvering v. San Joaquin Fruit & Investment Co., 297 U.S. 496, 498 (1936); Gay v. Burgess, 74 Atl. Rep. 714, 30 R.I. 231; Brooks v. Yawkey, 200 Fed. (2d) 663, 665 (1953); Phenix Insurance Co. v. Kerr, 129 Fed. 723, 727 (8th Circuit, 1904); American Law of Property, §11.17; Kadish v. Lyon, 229 Ill. 35, 40, 82 N.E. 194; Bras v. Sheffield, 49 Kan. 702, 710, 31 Pac. 306; Caldwell v. Frazier, 65 Kan. 24, 68 Pac. 1076; Luigart v. Lexington Turf Club, 130 Ky. 473, 480, 113 S.W. 814; Trumball v. Bombard, 171 App. Div. 700, 157 N.Y.S. 794; Gamble v. Garlock, 116 Minn. 59.
In the San Joaquin case, 297 U.S., supra--which involved a determination of (gain or loss resulting in) taxable income and this in turn depended upon an option to purchase which was contained in a lease--Justice ROBERTS said (p. 498): “But the option is admittedly not the same property as the land. So conceding, the respondent still insists that ownership of the option created an interest in the land. This would not be true of a bare option unconnected with a lease; but we are told that because embodied in the lease, the agreement became a covenant real and gave the lessee a species of interest or property in the land. The weight of authority is to the contrary, ....”
In Gay v. Burgess, 74 Atl. Rep., supra, the Court held that a holder of corporate bonds, with an option
In Brooks v. Yawkey, U. S. Court of Appeals, 200 Fed. 2d, supra, plaintiff sued for damages for breach of his option to purchase 200 acres of land. Defendant had sold 85 acres prior to the exercise of the option. The Court held that the unexercised option gave no right to damages and said: “But different considerations are involved in the case of an option to purchase real property unexercised at the time of expropriation. The reason for this is that an option is merely a contract whereby an owner binds himself to enter into a contract of purchase and sale with another at a specified price and within a given period of time in the future if the other chooses to do so. Thus it is held in New York, and generally elsewhere, that such an agreement alone does not give the optionee any interest in the real property covered by the option. Matter of City of New York (Upper New York Bay), 1927, 246 N. Y. 1, 157 N.E. 911.”
In Phenix Insurance Co. v. Kerr, 129 F., supra, the owner of a building destroyed by fire was held to be entitled to the insurance as against an optionee who had not exercised his option. The Court said (p. 727): “... while the owner of the option may accept it, and compel the owner of the property to comply with its terms, until the owner of the option does so he has no interest in the property. He has nothing but a mere
It is, I believe, clear that the City‘s unexercised option of purchase gives the City no interest in the Company‘s properties and no status whatsoever to maintain the present action.
Entirely apart from the question of the legal standing of plaintiffs, there is no value or equity in the option to justify an injunction. The payment of a dividend, if made from the net profits or earned surplus of the Company, could not possibly affect or injure the City‘s interest under the aforesaid option since (as the majority admit) the price which the City would pay under its option would be reduced by the exact amount of the dividends which were paid. Furthermore, even if the allegations of the City‘s complaint are true and even if the proposed dividend is illegally paid out of capital, the City‘s option is still valueless and cannot possibly justify the equitable relief herein sought. The City alleges that the outstanding liabilities of the Company exceed $68,000,000. and that its assets are not worth more than $50,000,000. In order to acquire, under its option, $50,000,000. of assets, the City would have to pay $68,000,000. of liabilities and at least $10. a share on the common stock or $17,268,000.,--a total of $85,268,000. In other words, in order to exercise its option which it is allegedly seeking in this proceeding to protect, the City would have to pay a minimum of $85,000,000. for assets which it alleges are worth not more than $50,000,000. In view of the serious, if not
THE CITY‘S STATUS AS A POSSIBLE GENERAL CREDITOR
The City‘s next contention is that it has a legal standing to enjoin payment of the proposed dividend because it alleges it has a status as a general creditor. The City is not a judgment creditor; it is not a lien creditor; it is not a present creditor; it merely hopes, apparently, to become a general creditor in the future. The City does not even aver that the Company has not in the past and is not now meeting all of its current liabilities, or that it is unable to pay claims which may be justly made against it in the future. Such a possible future creditor has absolutely no standing to bring this suit to enjoin the payment of a corporate dividend. Even if the payment of the proposed dividend were illegal--there is no question of actual fraud, but only of legal fraud--the City, under the facts set forth in its present bill and amended bill of complaint, would not thereby become a creditor within general principles of law, or within the purview of the
* The present injunction (a) will retard, if not block, the large-scale modernization program upon which the Company is presently engaged and which the City has been vigorously demanding, and (b) it will have an adverse effect upon the Company‘s credit, and (c) it will of course affect the rights of the stockholders--many of whom are needy employes of the Company--to a present small dividend, and will substantially impair, at least for the time being, the market value of their stock.
The City further contends that it is entitled to maintain this suit because the Company, although it has promptly paid the rent, has not adequately maintained three facilities which it leased from the City, viz., the Frankford Elevated, the Bustleton Surface Line and the Broad Street Subway. Even if this averment could be proved, it would not give this lessor any legal standing to enjoin the proposed dividend. It is a novel, dangerous and unsound doctrine that a lessor can enjoin the payment of a corporate dividend, especially when there has been no default in the payment of rent, and (we repeat) the City does not even aver that the Company has failed to pay its past or current liabilities, or that it is unable to pay claims which may be justly made against it in the future.
CITY IS ADEQUATELY AND AMPLY PROTECTED IN ALL ITS RIGHTS
The City of Philadelphia has many adequate remedies to enforce and protect each and every right it possesses under the 1907 Agreement and under the leases. If the City believes that the 1907 Agreement and the leases or both have been breached, it may maintain a proper action or actions (1) for the performance of any and every right it has under the Agreement and under the leases, or (2) for damages for breach of any and every right it has under the Agreement or the leases. The majority, overlooking these full and adequate remedies, cite the case of Pennsylvania State Chamber of Commerce v. Torquato, 386 Pa. 306, 125 A. 2d 755, as justifying the issuance of a preliminary injunction to save the City from irreparable damage. On the twin questions of legal standing and irreparable damage, the two cases are clearly distinguishable. In the Torquato (usually called the Westinghouse) case, the Unemploy-
Furthermore, the City, we once again repeat, has many and adequate remedies to protect every right it possesses under the 1907 Agreement and under the leases; consequently the payment of the proposed divi-
For the foregoing reasons it is clear that the City has no legal standing or status to bring this present suit in equity to enjoin the payment of a dividend. I would, therefore, reverse the order of the Court below, dissolve the injunction and dismiss the City‘s complaint.