106 Ky. 260 | Ky. Ct. App. | 1899
delivered the opinion of the court.
The Commercial Building Trust is a’ corporation organized in February, 1892, under chapter 56 of the General Statutes. The general nature of its business was to “lend its money to its stockholders, especially with the view of aiding them to procure homes, and, in case of a surplus not needed by the stockholders, to other persons.” Articles of Incorporation, p. 8. The object of the corporation was “to afford its members a safe and profitable investment for their earnings, and an opportunity to obtain loans upon easy terms, to purchase homes, and establish themselves in business.” By-laws, p. 9.
The capital scock was to consist of $10,000,000 — 100,000 shares, of the par value of $100 each — of preferred stock; and $1,000,000 — 1,000 shares, of the par value of $1,000 each — of common stock. The former, or preferred stock, was to be subscribed for and paid in upon such terms, and at such times, as the by-laws might prescribe; being in installments of small amounts, payable periodically or in larger payments, at the election of the subscriber. The common stock was to be subscribed for and paid in upon such terms, and at such times, as the board of directors might, from time to time, determine, and it might be issued in monthly or other periodical series. We conclude, there*fore, that the business of the concern, to all practical intents, was that of an ordinary building and loan associa; tion, so extended and amplified, however, as to embrace objects and purposes wholly foreign to such associations proper, and which have been condemned by this court in numerous cases.
The articles of incorporation provide that “the preferred
And a by-law provides that the funds of the common stock “shall constitute the guaranty for the maturity of the preferred stock.”
This preferred stock was to be issued in various classes, in some of which the dividend to be paid was at the rate of 8 per centum per annum, and in others at the rate of 10 per centum per annum, all payable semi-annually.
As soon as organized, the corporation began business, and issued, from time to time, both common and preferred stock. Becoming, insolvent, however, it made, in June, 1897, for the benefit of its creditors, an assignment of all its assets to the Columbia Finance & Trust Company. In the administration of the trust, the question was presented to the chancellor, in a suit brought for a settlement of the estate, whether, there not being enough money to pay the alleged preferred stockholders in full, the entire funds of the corporation should be distributed to them, to the exclusion of the common stockholders.
The chancellor answered this question by holding “that none of the stock of the defendant corporation is entitled to a preference over other stock in said corporation, and that all stockholders, indiscriminately, shall share equally in the distribution of the assets of the corporation in the hands of the assignee, in proportion to the amounts paid into the corporation by them, respectively, on their stock, after the payment of its debts, and the proper costs, expenses, and charges of the assignee in the execution of the trust.”
The correctness of this judgment is the sole question presented on this appeal. Without reference, for the pres
This is the only provision on the subject of guaranty to be found in the articles of incorporation, and it seems to apply only to installment stock. So construing it, the provision means simply that, upon the subscriber for this stock making his monthly payments of 60 cents per share for the period of seven years, or $50.40 in the aggregate, the corporation guaranteed that the dividends thereon would so accumulate as that the stock would be worth $1 per share. Putting the guaranty in another form, the corporation guaranteed that it would declare, at the end of seven years, a dividend of $49.60 on each share of preferred installment stock, but this stock is to be paid for in monthly installments of 60 cents per month.
In the by-laws,' however, there is a further provision, by which the corporation “guaranteed the maturity of class T) installment stock in seven years from the date of the first month’s dues paid thereon, andi class E installment stock in ten years from the date of the first month’s dues paid thereon, and class F paid-up stock in seven years from the date of its issuance. Here, again, is merely a guarantee that dividends sufficient to mature certain classes of installment stock and a class of paid-up stock would be declared at the end of seven years. The subscribers to this stock were members of the association, and participants in the scheme of so loaning out its funds as that the usurious rates were
Moreover, the guarantee' on the part of the company that it would declare, in a given time, certain dividends, or dividends sufficient to mature certain stock, or an agreement that it would set apart certain other stock as a guarantee of such dividends, can not be enforced unless there are net profits — dividends proper — out of -which the guarantee can be made good and the dividends paid. The reason is because the contract does not, and can not, in the nature of things, create the relation of debtor and creditor. The member is a shareholder in the association — a preferred one, it is true — when there are profits out of which he may be paid; otherwise, not. Mr. Cook, in his work on Corporations, says (section 271): “The law is now clearly settled that a preferred stockholder is not a corporate creditor.. A contract that dividends shall be paid on the preferred stock, whether any profits are made or not, would be contrary to public policy, and void. An agreement to pay dividends absolutely and at all events, from the profits when there are any, and from the capital when there are not, is an undertaking which is contrary to law and is void. Public policy condemns, with emphasis, any such undertaking on the part of a corporation as to its preferred or guaranteed shares.” (See, also, Taft, Trustee, v. Hartford, &c., R. R. Co., 8 R. I., 310; Lockhart v. Van Alstyne, 31 Mich., 76, [18 Am. R., 156].)
The contract then is a guarantee of dividends sufficient to mature the stock, and is enforceable
In re London India Rubber Co., 5 L. R., Eq., 519, there was a provision in the company’s charter securing to preferred stock a bonus or dividend out of money produced by the sale of certain property, not required by the company in the conduct of its business. This property was, in effect, pledged to the preferred stockholders, to secure this bonus or dividend, just as it is argued here we have a charge on the common stock to secure the maturity of the preferred stock by dividends large enough to mature it. It was argued in that case that the bonus or dividend should be paid out of the proceeds of the property when sold. The
So, we think here, the by-laws providing that the funds, of the common stock shall constitute the guarantee for the maturity of the preferred stock means that the common stock fund was a guaranty for the accumulation — the earning — of sufficient profits or dividend to mature the preferred stock, in a continuing association, and continuing, too, on a plan or scheme well known to all its members. There is no provision in the corporation’s charter or its by-laws, or in any of the certificates of stock or indorsements or specifications accompanying the stock, declaring that there ■was to be any preference given one class of stock over another in the capital or body of the concern. In the absence of such a provision, the stock is preferred only in the sense that it has priority in the distribution of dividends.. The
In Cook on Stockholders (3d Ed.), sec. 267, it is said: “By ‘preferred stock’ is to be understood stock which entitles the holder to receive dividends from the earnings of the company before the common stock can receive a dividend from such earnings. In other words, it is stock entitled to dividends from the income or earnings of the corporation before any other dividend can be paid.” And the same author (section 278) says: “Upon the dissolution of a corporation, and the distribution of its assets among the shareholders after the payment of the corporate 1 indebtedness, it is the settled rule of law that, in the absence of any provision in the statutes, by-laws, or certificate to the contrary, preferred stockholders have no priority over common stockholders.”
See, also, Beach on Private Corporations, sec. 507; 2 Waterman on Corp., sec. 155; 2 Thompson on Corp., secs. 2278-2280.
When we bear in mind that the corporation we are dealing with is a building and loan association, with certain underlying principles of co-operation, equality, and mutuality in its-make-up not common to ordinary corporations, and which may be termed the “common law of its existence,” the objections to upholding preferential contracts among members become apparent.
All such attempts are absolutely void, as contrary to the natural law of such associations. If their managers may attract investors by selling them preferred stock — preferred either as respects dividends or capital — the burdens of maintaining the organization, and in all probability all the losses of the concern,
The whole court sitting.