Arkansas and the opposition of the levee boards of Desha and Chicot counties of the state of Arklwslls, the contracts in question, in their objects and purposes, were impossible of performance; that the Tensas Basin Levee Board had a right to, and did, cancel the said contracts; that in no aspect of the case is the Railroad Company entitled to compensation for work done and expenses incurred in carrying out which might have resulted from the saidconfracts, nor for the performance of the same as a prerequisite to the conveyance of the lands in question; and that in all respects the decree of the circuit court appealed from should be affirmed; and it is so ordered.
STORROW et 81. v. TEXA.S CONSOLIDATED COMPRESS & MANUFACTURING ASS'N. (CIrcuit Court of Appeals, Fifth Circuit. No. 681. May 17, 1898.)
CoRPORATIONS-DIVIDENDS ON STOCK-POWERS OF DIRECTORS.
While it is largely a matter of discretion with the directors whether to declare a dividend out of the profits, or use them in the business of the company, there is a limit to this discretion; and the courts will not allow them to oppress the holders of preferred stock by refusing to declare dividends when the net profits and character of the business clearly warrant dividends. The face value of preferred stock is in the nature of a debt against the corporation, and the interest thereon. becomes a debt as soon as it can be shown there are profits wherewith to" pay it. .
. " ,
A bill by a holder of preferred sMck against a cbrPoratlon alleging that It basretuse(l to pay' its gljaranUed dividends.· on Its ,preferred stock, $.nd refused the holders thereof their that judgments are being taken against it;, that It is in1!olvent,aild,cannot be operated ,as a going concern with profit, and ought ·to be disintegrated, and the assets divided; that part of Its property has beensold'withoutauthority;and asking for a lien, the foreclosure thereof, themarllhaling of tP.e assets, and the appointment of a a case .for of equity.
Appeal from the Circuit CQurf of the United Sttltesforthe E,llstern District of TexaS'.
>rhe original bill IDed in this case November 18,1896, alleges that 'plaiilant Charles Storrow Is a resident and citizen 0'1" Brookline, In the state !of Massachusetts; thathe brings this suit for himselfatld all others similarly situated and iJ;lterested, to' make the,mselves parties thereto\ and complains the Texas Oompre!lS & Manufacturing Association, a cpr:poration, with its priJ;l.cipaI place of in the county Of Smith, state of Texas. It alleges that it was chartered on the 18th day of March, 1891, with' an authorized 'capital Of $1,000,000, divided Into 10,000 shares; . its pUrPose 'was the manufacture of cotton, cotton-seedoll, cotton. ,ties, and pressing cotton; thatln, accordance with a vote at a meeting of its stockholders held at Ft. Worth, Tex., on the 11th day ot May, 1891, and illaccordance with section 2, art. 7, of the by-laws approved by said association, seven compresses were purchased; $700,000 of common stock, and '$350,000'of' preferred stock; were issued. SUbsequently, four other bills were fHed,l;ca,lled "aid ,bills.'" Said complainants .' claim to be owners a,nci holders for vaJu'1,of some 400 shares of said preferred stOCk, Theexa.ct terms. ,Of the contract made by the, with the holders of the preferred stock 'are set out in the folloWing cett11lcate:
STORROW V. TEXAS CONSOLIDATED COMPRESS & MFG. ASS'N.
"No. 18(1. 100 Shares. "Texas Consolidated Compress & Manufacturing Association. "This is to certify that Charles Storrow is the owner of one hundred shares preferred stock, or'the par value of one hundred dollars each, in the capital stock in the Texas Consolidated Compress & Manufacturing Association, transferable only on the books of the association in person, or by attorney on surrender of this certificate. "This certificate is entitled to a guarantied dividend of six per centum per annum on the number of shares hereby represented, to be paid only out of the net earnings of said association, payabie annually on the first day of June of each year; and until such dividends, if any, are paid, no dividend shall be declared on the common stock of this association; but this certificate is not entitled to, nor shall it, participate in any dividends over and above said guarantied dividends as above stated, nor Is it entitled to vote at any stockholders' meeting. The directors of this association shall, at their annual meeting in each year, ascertain the net profits from the business of said association, and shall then and there declare such guarantied dividend of six per cent. "All insurance policies upon property belonging to this association shall be held in trust by said association for the benefit of the holders of these certificates; and in the event of the dissolution of said association, either by limitation or otherwise, the holders of preferred shares shall be entitled to be paid in full prior to any participation in the assets of this association by other stockholders. The company reserves the right to issue, in lieu thereof, first mortgage bonds, bearing interest at the rate of six per centum per annum, and secured by mortgage upon all the compresses of this association. "Tyler, Texas, June 24, 1893. Jno. 1\1. Duncan, President. "[Seal.] J. D. Secretary." Article 7, §§ 2 and 3, above referred to, are as follows: "Sec. 2. Not exceeding $50,000 in six per cent. bonds or preferred stOCk, bearing six per cent. interest, or entitled to six per. cent. dividend. and $100,000 in common stock, shall be issued on each' compress that may be owned' and brought into this association. Such preferred stock shall be entitled to six per cent. dividend or interest, and shall not be entitled to VOle. "Sec. 3. On the issuance of any bonds by this association, the association shall put aside, of the earnings of the association, 2 per cent. annually, as a sinking fund to liqUidate the bonds thus issued, before any dividend is declared on the common stock," Complainant further alleges, upon informationllnd belief, and so charges the fact to be, that it was the intention of the parties who originally organized said defendant corporation, and all of the stockholders and directors of, said corporation at the time of the issuance of said preferred stock, that, in a reasonably short time after the issuance thereof,said preferred stock should be converted into and substituted by first mortgage bonds of the same amount as the said stock, and bearing the same rate of interest per annum as is provided that the said stock shall bear, and that the first mortgage bonds should be secured by a mortgage upon all of said seven compresses then and there owned by the defendant association, as aforesaid; tlIat, at the time complainant and others acquired said stock, it was known and generally understood, and complainant verily believed it to be the plan and purpose of said defendant association. and of all its officers, directors, and stockholders, to substitute said stock with first mortgage bon(is of said association, as aforesaid, and that said preferred stock should be considered as, and be 'In' effect, the same as first mortgage bonds of said association, and the holders thereof considered as creditors of said association to the extent of such preferred stock as should be held and owned by them; that the complainant was induced to acquire said-preferred stock upon the statement and representation of J. H. Brown, who was the president, and John A. Brown, who was the secretary, of said association, that said stock was in effect a first mortgage bond, and would be converted into the form of a first mortgage bond at an early date. Complainants claim a lien upon the net profits of the said association wbich may have been received \lpon any of its property,
87 FEDERAl>, REPORTER;
and upon any property or betterments that may have been acquired by the net profltsfrom the business. They, further allege that sufficient net profit to pay the dividends due them ontp.epreferred stock was .earned during the of 1892, 1893, 18M, 1895,and. 1896, but that nos\lch dividend was declared durlpg said years,. anq :that said association has wrongfully and willfp,llY,diverted the said netp,rofits in divers ways, for purpose of depriving complainants of their dividends, and for the purpose of depreciating and destro:yiJJg tl:W value of the ,preferred stock, so the owners of the majority of the cOIllmo'n stock mightp.urchase I.t at a nominal price. 'fhey allege a. scheme On the part. Of the .holders of the majority of the common /!tock to .wreck ,the corporation; that judgments for large amounts were by the being ohtalnedagainst the company 'and large losses had deposltlp.Fiist National Bank of Tiier, which subsequently failed; that the attorney for tlfe bank was thepres\deJttof the defendant; andthut tlle presof the company, anl'! that they ident pf the bank was the general so kellPhe' f\mds of the company)rnowing the conditio.n of the bank; that on a wasaPIjl,&r,nted to preP:'lre Ii fllan for liqUidating and wmclmg up the affaIrs of the association, whIch reported the debts of the to be $50,000, preferred stock outstanding $310,000, and the entire )cpJ;Upresses owned by theasEiociation were worth $240,000. A comw,aij uPj;lQinted to sell the' The facts disclosed In, said meeting were 'that the assets were of far· 'less value than when the association comme,nced business, arid that it Is deeply in debt, and cannot pay its debts in que course of business; that' the. corporation cannot be .operated as a going concern with any profit, and ought to be disintegrated, and the assets divided; that the aSllociation loaned its credit to the First National Bank of Tyler fQr$15,OOO, and sold the com'press at Gatesville for $15,OQO, without authority; t:\1iJ.tthe association has refused to take any action for the proof tection > the preferred stockholders, and its directors deny that said stockholders are entitled to any relief>; that the complainant has demanded of the defendant that the di,vidends to which he is entitled be declared and paid, which l1emand has been refused. The bill cpncludes with a prayer fOf,JI. receiver, and an accounting and. marshaling of the assets; that the rights ,of all creditors be ascertained, and, the rank in Which they . are to pe paid adjUdged; for a decree. compelling· the directors to.l1eclare a dividend; that ,the preferred stockholders be declared to have a lIen upon the net earnings .whlch should have been paid to them, or upon the plant and properties purchased therewith prior to the lien of all others; that the stock be adjudged to be a first mortgage bond in effect, etc.; prohibiting from taking an;y step or doing for an any act or thing that IDllyaffect tlteright of the complainaritpending the litigation, or. wblch may InterferE!' .wlth the enforcement of such decree as may 'berenilered;. that complainaut's)ien be foreclosed, the property sold. the 'indebtedness of the cost paid, and the balanCe of proceeds. applied to > d.ef.endant to its rank, as adjudged by the court. . ' Defendant's demurrers to the "aid bills" .and amended bilI are as follows: "This defendant, by protestation; not' nor acknowledging any of the matters or. things in said bills of complaint contained. to be true in such manner and form as the same ther¢in" set forth and alleged, doth' demur. to the said bills, ami, for causes of demurrer,showeth: (1) That it appeareth by. each complainant's own showing .l;ly each ,of. said bills. that he. is not entitled. to the relief prayed for by the pills against the. defendant. (2) That there is no equity in the bills, and that It. appears from the face. thereof that. if the complainant be entitleCi to any relief, they have a full 'and adequate at law. (3) That it apPearsJ:lY the bill that the complainants are not, nor either of them, creditors. ot the defendant, and have no lien. upon the propl!rtY.of 4efendaDt. (4) That plaintlff:s suits are,IH' effect, to dissolve defenqant ct;lrporatlon,and to distribute .Its assets" .of .which proceeding a court of· equity hath no jurisdiction., (5) That there' are in the bills no facts. setfprth showing insolvency of dl!fendant,but' n+erely a naked averment of Insolvency. (6) That It Is oat shown by said bills, nor either of them, that the defendant corporation is dissolved, nor that there exists. any cause for its dissolution" (7) That cO!llplalnants do not show that the,)' have no remedy, through tlie corporation itself, for the alleged injuries COlU-
8TORROW V. TEXAS CO,NSOLlDATED COMPRESS &: MFG. ASS'N.
plalned of. (8) That complainants .do not allege demand on the corporati6n or Its officers for the declaratloli of a diVidend, .nor demand for the payment 01' the dividends alleged to be due. (9) That the complainants do not show that they are those for.' whose benefit they sue, did not assent to, or that they protested against, any 01' the acts or omissions of which they complain. (10) That the bill shows that, If complainants ever had any cause for action against the defendant, the same is barred by their oWn laches. (11) That 7I'lJile the bills charge, in terms, fraud and bad faith, they set out no facts or circumstances showing the same, but and only warranted transactions, innocent in themselves, and arising from the exercise of that discretion and jUdgment committed to the directory by defendant's charter, by-laws, and by the laws of the land. (12) That while said bills charge a combination or conspiracy between H. H. Rowland and J. D. Moody, two of defendant's stockholders, to depress the value of Its stock, the same does not show how, in any way, the corporation Is responsible for their motives or actions, or how said Moody and Rowland 'dictated' and 'controlled' the action of the defendant corporation, in any other way than by voting stock which they were legally entitled to vote. (13) That paragraph 1401' said original bill insufficiently charges a scheme by said Rowland and Moody to acqu!t'e a majority of the common stock of defendant corporation, without alleging any of the facts or circumstances constituting said scheme, or that they acq\llred a majority of said stock in any other way than fairly and legally. (14) That such of the aIlegadoIls of paragraph 14 of the orig-inal bill as are introduced by the words 'alleges upon information and belief,' and by the words 'Is Informed,' without charging such allegations to be true, arE> Insufficient. (15) That the said bJils undertake to vary or rather to substituttJ by parol the terms of a written Instrument, the foundation of the action set out in the bills, to wit, the certificates of preferred stock in defendant corporation, upon which this suit Is brought. (16) That neither of said bills contains allegations that the plaintiff was a shareholder in the defendant corporation at the time of the transaction of which he complains, or that his shares had devolved on him since, by operation of law, nor that the suit Is not a collusive one to confer upon a court of the United States jurisdiction of a case of which it would not otherwise have cognizance; nor do said bUls set forth any effort of either of the plaintiffs to secure such action as they desire on the part of the managing directors or shareholders of defendant.Wherefore, and for divers other good causes of demurrer appearing on said bill, the defendant doth demur thereto. It prays the judgment of this honorable court whether It shall be compelled to make any. answer to said bills, and It prays to be hence dismissed, with its reasonable costs In this behalf sustained."
W. S. Herndon and Ben B. Cain, for appellant. John M. Duncan, for appellee. Before PARDEE and McCORMICK, Circuit SWAYNE, District Judge.
SWAYNE, District Judge (after stating the facts). Much of the difficulty arises in this case from the want of a proper understanding of the difference between the common stock and preferred stock, and the respective rights of the holders thereof. Among the rights of the holders of common stock are those of attending and voting at the meetings of the corporation, participation in the election of officers, the formation of by-laws, the participation in the profits and losses, and in the final divisien of the property upon dissolution. Ashare of stock has been defined to be a right which its owner has in the management, profits, and ultimate assets of the corporation; but he has no legal title to the profits or property of the. corporation until a is declared, and a division made on the dissolution of the cor-
87 FEDERAL REPORTER.
poration. Common st&k differs iIi.many ways from what is termed "preferred stock." The owner of the former is entitled to an equal pro rata division of the profits,if there be any; but has no advantage of any other shareholder or class of shareholders of common stock. Preferred" stock, on the other hand, generally elltitles its owner to dividends out of the net profits before and in preference of the holders of the common stock. Generally, the rights, powersr and privileges of preferred stockholders depend\lpon the terms upon which it is issued;. making ,a multiplicity of ,forms, according to the desire or ingenuity of the stockholders, and the necessity of the corporation :itself. The percentage of pl'eferr'ed stock dividends is always fixed before it is issued. It is a matter 'of contract, and may be made cumulative, as it was in this case. Every holder of preferred stOck, by its terms, was guarantied a dividend of 6 per cent. per annum thereon to be paid out of the net earnings of the association, which are propetly the gross receipts, less the expenses of operation, interest on. debts, and other liabilities payable first. The rest is the net profits out of which the Shareholders of preferred stock should be paid the 6 per cent dividend. While it was largely a matter of discretion with the Mardof directors as to, what use they would put the profits tQ,whetber to declare a dividend or use tllem in the business of thecompany,tbere is a Hiott to tbis disqretion; and the courts will not allow the ,diFectors to use their powers oppressively by refusing to declare a dividend while thenH profits and character of the business clearly warrant it. 'rhis rule is applicable not only to the holders of the common stoCk, but also to the preferl'ed stock,which is entitled, as a matter of right, to have a dividend declared out of the net profits, if it can be shown that the directors did not exercise reasonable disI,n withholding By the final dissolution onhe corPor&tjon, the holders of :the preferred stock would be entitled to receive only the full face value thereof, after which the balance of the property would be'equally divided among the The bill alleges, and the demurrer admits, that, during the time in question, the association had earned' sufficient net profits from the operation of the compresses to pay the 6' per cent. dividend on its preferred stock.lt also, states that the said association wrongfully and willfully diverted the net profits.earne(j. by it, and has used and appropriated the same in divers and sundry ways for the purpose of depriving the complainants of their dividends, of destroying the value of the' preferred stock; a,nd this was done by the majori.ty.of of. the common stock: in fraud of the of complamants. WhIle It has been determmed that the claIm of the holders of the. stock against the corporation is not strictly a, debt, but iscolltingent upon the existence of sufficient net profits to pay itl itis evident that preferred stock is only a security for a loan, uponwhic'h a certain and definite interest ,was to be paid while the corporation existed, and the full amount thereof returned to the lender when it was dissolved, before the holders of the common stock should receive anything. The preferred stockholder has no vote or voice in the management of the corporation.. He sessed none of the rights of a COmmon stockholder as such, and
VANVALKENBERG V. AMERICAN FREEHOLD LAND MORTGAGE CO.
about the only difference between him and the ordinary lender of money was that he was not to receive his interest unless there were sufficient net profits to pay the same. Therefore, so far as the face value of the preferred stock is concerned, it is in the nature of a debt against the corporation, and the interest thereon becomes a debt as soon as it can be shown that there were profits wherewith to pay it, and becomes a lien prior to the rights of the holders of common stock upon the net earnings, if there were such, for the amount of the dividend, and can be followed wherever invested by the company. This contention is further maintained by the fact that the company reserved the right to issue, in lieu of the preferred stock, first mortgage bonds, bearing interest at the rate of 6 per cent. per annum, secured by a mortgage upon all the compresses of the association; thus making this loan represented by the preferred stock payable at any time upon the will of the corporation. The other allegations in complainants' bill in regard to judgments; the insolvency of the corporation; that it could not be operated as a going cOncern with profit, and ought to be disintegrated, and the assets divided, and that part of the property had been sold without authority; that their right to have a dividend declared on their stock had been neglected and refused; that their right to receive the full face value thereof had been denied by the corporation,-are matters that can only be investigated and determined by a court of equity. The investigations of the amount of the net income, and the proper disposition thel'eof, the marshaling of assets, the priority of liens, and the foreclosure of same, as well as the prayer for injunction and receiver pendente lite, are proper matters for the consideration of the chancellor, and cannot be proceeded with in a court of law. The case made by the bill, if sustained by proof, would undoubtedly entitle complainants to relief. Therefore the decree dismissing the bill is reversed, and the case remanded, with instructions to grant a rehearing in the case, and proceed as equity may require.
VANVALKENBERG et at. v. AMERICAN FREEHOLD LAND MORTGAGE CO. OF LmmON, I.lmited. (CIrcuIt Court ot Appeals, Fifth CircuIt. No. 641. Mar 10, 1898.)
'Where the only property owned by a mortgagor In a certaIn quarter I!lectlon Is the portion lying south of a creek,. which portion contains about 80 acres, a mortgage describing land as "thirty acres in" said quarter section is not so vague and Indefinite al!l to be Incapable ot being aided by parol proof. Where land is eonveyed by a mortgage, by uncertaIn term! ot deI!lcription, It Is not Indispensable to the identification of the land that the mortgagee should ha ve been placed In actual possession.
-Where a mortgage describes land as "thIrty acres In" a certaIn quarter .action, tt Is not necessary that such land should be laid off In thetorm