Case Name: Miller, Executor, v. Ratterman, Treas
Court: Supreme Court of Ohio
Jurisdiction: Ohio
Decision Date: 1890-03-04
Citations: 47 Ohio St. 141
Docket Number: 
Parties: Miller, Executor, v. Ratterman, Treas.
Judges: 
Reporter: Ohio State Reports, New Service
Volume: 47
Pages: 141–166

Head Matter:
Miller, Executor, v. Ratterman, Treas.
Stockholders — Owners of Preferred Stock entitled to vote at stockholders’ meetings — Exceptions—Certificates of preferred stock, not certificates of indebtedness — Solders of, not creditors — General guaranty of dividends on, not a guaranty in any event — Mortgage to secure dividends —Incidental only to the principal obligation — Act of April 16, 1870, construed — Certificates of preferred stock, issued thereunder, not taxable.
1. The act of April 16, 1870, entitled “an act to enable railroad companies to redeem their bonded debts,” (67 Ohio Law, 89,) authorizes the issue of certificates of preferred stock, and does not authorize the issue of certificates of indebtedness. The holders of certificates issued under and by virtue of the provisions of the above act, are stockholders in, and not creditors of, such corporation, and, under section 2746 Revised Statutes, are not required to list their shares for taxation in this state.
2. Where, in a resolution adopted by stockholders of a railroad company, authorizing the issue of a preferred stock, it is recited that the stock is to be issued under and by virtue of the provisions of the foregoing act, the same being^ referred to by its title and date of enactment, which resolution is made a part of the certificates thereafter issued by the company, the terms of such act thereby become, in legal effect, a part of the certificates. And such certificates, so issued, 'will he held to he certificates of stock unless, considering the whole transaction, it is clear that the purpose was to create a debt, and unless a debt was, in fact, created.
3. The ownership of stock in an incorporated company, as a general rule, carries with it the right to vote upon the same at any meeting of the holders of the capital stock. But to this rule there may be exceptions; and it is competent for a railroad company, in issuing certificates of preferred stock, to stipulate therein that the holders shall not have or exercise the right to vote the same, or as owners of the sam$, at any meeting of the holders of the capital stock of the company;
4. A general guaranty of dividends by a railroad company, on its preferred stock, is not a guaranty for payment in any event, hut only in the event that dividends are earned.
5. A mortgage given by a railroad company, to secure the payment of dividends to the holders of certificates purporting to be certificates of preferred stock, is an incident to the principal obligation, and the terms and purport of the certificates will he held to express the real intent of the parties, even though some of the stipulations of the mortgage may be apparently inconsistent with the intent as expressed by the certificates.
(Decided March 4, 1890.)
Error, to the Superior Court of Cincinnati.
The action below was brought against the treasurer of ^Hamilton county to enjoin the collection of a tax. Plaintiff alleged in his petition, in substance, that the county auditor had placed upon the duplicate the sum of $28,700, purporting to be amount and value of preferred stock held by the plaintiff, as executor, in The Dayton & Michigan Railroad Company, and caused to be assessed against the plaintiff the sum of $493.22, as tax and penalty thereon; that The Dayton & Michigan Railroad Company is a corporation existing under the laws of Ohio, and that its property is situated wholly within this state, and that its stocks are not taxable under the laws of Ohio, and that the assessment is wholly illegal and void.
By answer and cross-petition the defendant set up a claim for taxes for the six years preceding, upon the stock described in the petition, amounting in all to $2,455.32, and penalty, averring that the personal property on which the taxes were assessed, were certificates of The Dayton & Michigan Railroad Company, which were issued by the company as evidence of indebtedness of the company to the holders thereof, the same bearing interest at the rate of eight per centum per annum, payable quarterly, and secured by mortgage of the company on all its property, income and franchises, and by The Cincinnati, Hamilton & Dayton Railroad Company on its lease thereof, which mortgage had been recorded in all the counties in Ohio in which the property of the company was located, and was still in force.
At the trial, copies of the certificates and of the mortgage were introduced in evidence. The former is as follows:
“Certificate of Stock.
No.- Shares-
Dayton & Michigan Railroad Co. preferred stock. Secured by mortgage and guaranteed by The Cincinnati, Hamilton & Dayton Railroad Company.
This certifies that-the owner of-shares, of fifty dollars each, in the preferred stock of The Dayton & Michigan Railroad Company, transferable only on the books of the company in person or by attorney, on the surrender of this certificate.
This stock is issued in pursuance of' an act of the general assembly of Ohio, passed April 16, 1870, entitled “an act to enable railroad companies to redeem their bonded debts,” and in accordance with, and subject to the terms and conditions of a resolution of the stockholders of this company passed December 22, 1870, endorsed on the back hereof. The dividends at the rate of eight per cent per annum are payable quarterly at the office of The Cincinnati, Hamilton- & Dayton Railroad Company, in Cincinnati, on the first Tuesday of January, April, July and October of each year, and are guaranteed by that company.
Witness the seal of the corporation, and signatures of the president and secretary, at Toledo, this-day of-188-
-Secretary. -President.
Authorized issue, $3,700,000. Shares, $50 each.”
ENDORSEMENT ON OERTIEICATE.
“This is to certify that on the 22d day of December, 1870, the stockholders of The Dayton & Michigan Railroad Company adopted the following resolution :
“ Resolved: That this company under and by virtue of the provisions of the act of the general assembly of the state of Ohio, entitled: ‘An act to enable railroad companies to redeem their bonded debts,’ passed April 16, 1870, and for the purpose of providing means for the redemption of its bonds aforesaid, secured by mortgage on its road, does hereby create and authorize the issue of a preferred stock, to an amount of three million, seven hundred thousand dollars, divided into seventy-four thousand shares, of fifty dollars each, and do hereby promise and guarantee to the holders thereof, dividends thereon, payable quarterly, on the first Tuesdays of January, April, July and October in each year, at the office of The Cincinnati, Hamilton & Dayton Railroad Company, at Cincinnati, at the rate of eight per centum per annum, on the par nominal value thereof, provided, however, that the holders of the certificates of said preferred stock, shall not have or exercise the right to vote the same, or as owners of the same at any meeting of the holders of the capital stock of said company, and provided, also, that no further or other mortgage the projDerty, rights, or income of said company, shall ever hereafter be made to the prejudice of the holders of said preferred stock, and as security therefor, the right of the holders of said preferred stock to the dividends thereon, shall be secured by a mortgage on said property, rights and income, which conditions shall be printed as part of the certificates to be issued for said stock.
And that on the 20th day of December, 1870, the directors of The Cincinnati, Hamilton & Dajdon Railroad Company, adopted resolutions, which were duly ratified by the stockholders of said company at a meeting thereof, duly called for that purpose, and held on the 15th day of February, 1871, whereby said company guaranteed to the holders of said preferred stock, punctual payment of the dividends thereon according to the terms thereof.
And that on the 12th day of September, 1871, a mortgage on the property, income andfranchises of The Dayton & Michigan Railroad Company, and of the interest therein of The Cincinnati, Hamilton & Dayton Railroad Company, under its lease thereof, was duly executed and delivered to Stanley Matthews, as trustee, to secure the payment of said dividends, and has been recorded according to law.
-President. ) C. H. & D.
> and
-Secretary. ) D. & M. R. R.”
The act of April 16,1870, referred to in the certificate, is as follows:
“An Act to enable Railroad Companies to redeem their bonded debts.
“ Section 1. Be it enacted by the General Assembly of the State of Ohio, That it shall be lawful for any railroad company, incorporated under the laws of this state, for the purpose of providing means for the redemption of its bonds, se.cured by mortgage or other lien upon its road, property or income, to issue and dispose of preferred stock, to such an amount as may be authorized by the stockholders as hereinafter provided for, and to guarantee to the holders thereof semi-annual or quarterly dividends, not exceeding eight per centum per annum, payable at its office, or such place as may be designated by the directors.
“ Section 2. The unpreferred stock of the company shall be entitled to dividends only out of the surplus of the profits, after setting apart a sum sufficient to pay the dividends upon the preferred stock.
“ Section 8. Before any stock shall be issued under this act, a majority of the directors who desire the same, shall call a meeting of the stockholders of said company, designating the time and place, and distinctly the purpose of said meeting, which meeting shall be held at the principal business office of said company in this state; notice of said meeting shall be given at least thirty days by continued publication in at least two newspapers published and having most general circulation in this state, and one in New York city. If at said meeting the consent of a majority in interest of the existing stock of the company, shall be given to the issue of such preferred stock of the company, it shall be the duty of the president and secretary of said company to make out an abstract stating the total amount of pre-existing stock, the amount of preferred stock authorized, and the vote of said meeting; to which they shall attach copies of said notice, and designate the time for which, and papers in which the notices have been published, to which abstract and statement they shall make affidavit and file the same in the office of the secretary of state.
“ Section 4. It shall be lawful for the directors of such company, to dispose of such preferred stock, on such terms as they may deem advisable in exchange for, or redemption of any outstanding bonds, for the payment of which said company is bound, whether as principal or guarantor, and whether the same has matured or not, or said company may dispose of such stock, or any part thereof, for cash; but in such event^the proceeds thereof shall be set apart and appropriated only to the purchase and redemption of its bonded indebtedness as aforesaid.
“Section 5. This act shall take effect from its passage.”
Omitting the parts of the mortgage which are recitals, the balance of the mortgage is as follows :
“Now, therefore, this indenture, entered into between The Dayton & Michigan Railroad Company, party of the first part, The Cincinnati, Hamilton & Dayton Railroad Company, party of the second part, and Stanley Matthews, party of the third part, Witnesses:
“ That the party of the first part, in consideration of the premises and of one dollar to it paid by the party of the third part, the receipt whereof is hereby acknowledged, hath granted, bargained, sold and conveyed, and by these presents, grants, bargains, sells and conveys to the said party of the third part, and his heirs, successors and assigns forever, all the said railroad and appurtenances, and the real estate, and all the rights, franchises, issues and profits therefrom, of the said The Dayton & Michigan Railroad Company, described and conveyed in any and all of the said foregoing recited mortgages and deeds of trust, and all the estate, right and title of the party of the first part, in and to the same.
“ And, that the party of the second part, in consideration of the premises, and of the sum of one dollar paid to it by the said party of the third part, the receipt whereof is hereby acknowledged, hath granted, bargained, sold and conveyed, and by these presents does grant, bargain, sell and convey, to the said party of the third part, his heirs, successors and assigns forever, all the said railroad of the said party of the first part, and its appurtenances, and real property aforesaid, together with all the franchises, issues and profits therefrom, as held and claimed by said party of the second part, under and by virtue of the lease thereof, dated May first, eighteen hundred and sixty-three, as modified by agreement of June twenty-third, eighteen hundred and seventy, hereinbefore recited and referred to, and all the estate, right and title of the said party of the second part, as lessee thereof, as aforesaid, in and to the same.
“ To have and to hold the same to the said party of the third part, his heirs, successors and assigns forever.
“ In trust, nevertheless, to and for the uses and purposes, and upon the terms and conditions following, and not otherwise, to wit:
“ First. That the said parties of the first and second part shall not hereafter at any time, by any deed or instrument, convey or encumber the said railroad or other property herein conveyed, or any part thereof, or any of the rights, franchises or income appertaining to, or issuing out of the same, to the prejudice of the holder or holders of the said preferred stock hereinbefore described and referred to, or of any share or shares of the same, whether held under and by virtue of any original certificate therefor, or under and by virtue of any certificate issued upon the transfer, or in lieu of any such original certificate, by means whereof the equitable lien of said holders of said stock, as created by this deed, shall be impaired or postponed or their security in any wise lessened. Provided, however, that nothing herein con tained shall be so construed as to preclude or prevent said parties, or either of them, from executing any mortgage or deed of trust of said property, rights, franchises and income, the lien of which shall be subsequent in time and right to that hereby created;
“ And provided further, that the said preferred stock shall be so disposed of, either by sale, or by exchange for mortgage bonds, as that the total amount of dividends upon the preferred stock issued as herein provided for, and interest upon such mortgage bonds, of the several issues hereinbefore recited as shall not be surrendered, shall not exceed in aggregate the aggregate amount of interest upon said mortgage indebtedness as hereinbefore recited, that is to say, the amount of said dividends and interest shall never exceed the amount of the interest that was payable on said mortgage indebtedness as it existed December twenty-second, eighteen hundred and seventy.
“ Second, That in case the said party of the first and second parts, shall fail to pay the interest on any of the bonds secured by any mortgage, deed of trust or other conveyance now subsisting, and the lien of which is prior to the lien of this conveyance, or shall fail to pay to any holder or holders of any share or shares of said preferred stock, the dividend or dividends accruing on the same, when and as the same shall fall due and become payable, according to the terms and conditions expressed in the certificates thereof, and as herein provided for and recited, and said default shall continue and remain for the period of sixty days thereafter, the said party of the third part, his heirs, or successors in said trust, on the demand in writing of any such holder or holders of said preferred stock, and within a reasonable time thereafter, may enter into possession of the said railroad, real estate and all other property, rights, franchises and income hereby conveyed, and have, hold, manage and control the same, and the proceeds thereof thence arising apply to the payment of the reasonable and necessary expenses of operating the same, including a reasonable compensation to the said trustee, and the surplus then remaining to the payment of the dividends on said preferred stock then in arrears, after providing for and paying all other prior lawful charges thereon, or at his option, said trustee may take the proper and necessary steps, as he may be advised, by judicial proceedings, to foreclose this mortgage and execute the trust hereby created by the sale of the said railroad and other property and rights hereby conveyed, for the payment of said arrears, according to the common course of judicial procedure, in such cases made and provided, or otherwise as it may be adjudged, but it is expressly provided and agreed that in the event of the sale of the said premises under this trust and mortgage, the proceeds of said sale, after the payment of costs, expenses and all lawful prior charges thereon, shall be applied to the redemption at its par or nominal value of the said preferred stock herein provided for by a distribution of said proceeds of sale so far as may be necessary for that purpose, to and among the holders and owners of the shares of said preferred stock, in equal proportion according to the amounts owned and held by them respectively.
“Third, That in case of the death, bankruptcy, resignation, or disability to act of the said party of the third part, the title and estate hereby conveyed to him, shall devolve and vest in his successor in said trust, to be appointed upon the application of either of the other parties hereto, or in default of such application, then upon the application of any holder or owner of one or more shares of said preferred stock, by any court of competent jurisdiction within this state.
“And the said party of the first part hereby covenants, promises and agrees to and with the party of the third part, his heirs and successors in said trust; that the said party of the first part, will and shall punctually pay to the holders of the shares of said preferred stock severally and respectively, as and when the same shall become and fall due, according to the terms of the certificates thereof the dividends thereon, as herein provided for and specified, and the said party of the second part, covenants, promises and agrees to and with the said party of the third part, his heirs and. successors in said trust, that said party of the second part will and hereby does guarantee to the holders of the shares of said preferred stock severally and respectively as and when the same shall become and fall due, according to the terms of the certificates thereof, the payment by the said party of the first part, of the dividend thereon, as herein provided for and specified.
“And the said parties of the first and second part hereby severally and respectively covenant, promise and agree to and with the said party of the third part, his heirs and successors in said trust, that they will each of them, whenever necessary for the purpose of more effectually carrying into execution the intentions and purposes of this conveyance, make to the said party of the third part, his heirs and successors in said trust, such other and further assurances of the said title and estate as may be necessary or proper thereto, whenever thereto required.
“ In testimony whereof, the said The Dayton & Michigan Railroad Company, by Daniel McLaren, its president, and The Cincinnati, Hamilton & Dayton Railroad Company, by Daniel McLaren, its president, thereto duly authorized by resolution of the board of directors of said companies, respectively, have hereunto respectively set their corporate names and seals, on the-day of-, eighteen hundred and seventy-one.”
Judgment was rendered by the superior court in special term for the defendant on his cross-petition, which was affirmed in general term. To reverse these judgments the present proceeding in error is brought.
Ramsey, Maxwell Ramsey, for plaintiff in error.
The question is whether money paid to a corporation in consideration of the issue of preferred stock, is paid by way of loan, or as a contribution to the capital of the corporation. If the transaction is a loan, the corporation becomes indebted for the ultimate return of the money, and for the payment of interest meantime. If the transaction is a contribution to the capital, no debt is credited, and the right of the preferred shareholder is, not to the return of his money, but only to participation in the distribution of assets on the winding up of the company, after all debts are paid, and meantime to receive a share of the profits, if profits are earned, but not otherwise.
Applying these tests it is manifest that the status of the plaintiff is that of shareholder, and not of creditor. His relation to The Dayton & Michigan Railroad Company and to the creditors of that company, is simply that of stockholder ; it differs in no respect from that of a common stockholder. He has no greater or different claim against the corporation than any common stockholder; he has no other right or claim than to be paid dividends, if they are earned, which is the right of every stockholder in every corporation. He differs from a common stockholder only in the right, as between him and the common stockholder, to have the profits that are earned, distributed to him up to a certain rate, before any distribution is made to the common stockholder, and (probably) upon the winding up of the corporation, to have his contribution to the capital returned to him out of the assets, if any are left after the payment of all debts, before any distribution is made to the common stockholder. Pierce on Railroads, 124; Jones v. Erie Ry. Co., 22 Wall. 136, 147. A guaranty of dividends on preferred stock is not a guaranty for payment in any e.vent, but only in the event that dividends are earned. Lockhart v. Van Alstyne, 31 Mich. 76; Taft v. Railroad Co., 8 R. I. 310; P. & H. Ry. Co. v. King, 17 Ohio St. 534; Pierce on Railroads, 125; Cook on Stock and Stockholders, sec. 269-270.
The manifest purpose and only object of the act in question, was to 'enable persons who theretofore sustained the relation of creditors, to surrender their debts, and change their relation to that of stockholders. Ryan v. The Miami Valley Ry. Co., 10 A. L. Rec. 263-268.
If preferred stock is to be treated as a credit it should not be assessed for taxation at more than its face. A credit may be worth less than its face, but not more, for purposes of taxation. At bar $16,950 of stock is assessed against the plaintiff in error at $23,700.
Gross Qohen, for defendant in error:
It has been held in the case of The Western Union Telegraph Company v. Mayer, 28 Ohio St., 251, that the provisions of see. 2, Art. 12 of the constitution, are not grants of power to the legislature, but limitations or restrictions of the general power conferred by article 2, section 1, of the constitution, which section vests the legislative power of the state in the general assembly. It would follow from this, that all investments in stocks of whatever character, whether common or preferred, were taxable. In other words, that it is the duty of the legislature under this constitutional provision to pass laws taxing the same, and the legislature has provided for the taxation of such investments in sections 2730, ’31, ’34, ’35, ’36, ’87, ’39, ’46 and 2747; and, (where property has been omitted from taxation,) by sections 2781 and 2782.
The last clause of section 2746 provides that “ no person shall be required to list for taxation any share or shares of the capital stock of any company, the capital stock of which is taxed in the name of such company,” and under this clause of section 2746, it was held in Jones v. Davis, 35 Ohio St., page 474, that “the personal property which a corporation, organized and doing business under the laws of this state, was required to list for taxation, embraced the capital stock of the corporation, and such being the case, the owner of shares of the capital stock in such company was not required to list his shares for taxation.” It has been the uniform ruling that the language of any statute by which exemption from taxation was claimed, (said exemption being in derogation of the rights of others,) should be strictly construed. Cincinnati College v. State, 19 Ohio, St. 110; Knoup v. Bank, 1 Ohio. St. 603; Grerke v. Purcell, 25 Ohio St. 229; Library Association v. Pelton, 29 Ohio St. 210.
We differ entirely as to the question for consideration bj this court. The question is not, as stated by counsel for plaintiff in error, one whether preferred stock is stock or not, but: “ Is this a certificate of preferred stock, or is it a certificate of indebtedness of The Dayton & Michigan R. R. Co. ? ”
They say in their brief, that the Superior Court held that preferred stock is not stock, but a credit and taxable. Not so; it simply held that these certificates, which they assume to be preferred stock, and which are so called on their face, are not certificates of indebtedness.
We apprehend that there is no serious controversy upon the question of the rights and obligations of preferred stockholders, but, as we have said, that is not the question here; the question for consideration being whether the facts and circumstances of this case make these certificates, certificates of preferred stock, or whether they are certificates of indebtedness. No mortgage with the peculiar conditions of the mortgage in question, was given to secure the certificates referred to in the Michigan case.
The act in question provided for the issuing and disposing of preferred stock and for giving a mortgage or other lien to secure the same. But the company went further, and under general powers, has actually borrowed the money and issued certificates of indebtedness for the same. The certificate provides that the holder shall not have the right to vote the same. The holder is absolutely barred, in advance, from ever exercising the right, and therefore the power never could exist under this contract for him to exercise that right which a shareholder must, at some time or- other, have. It is also provided, that no further or other mortgage upon the property, rights or income of the company, shall ever thereafter be made to the prejudice of the owners of said certificates. A mortgage was made securing the payment of said dividends, and as a result, large amounts of money were funded into what was really a new debt of the company. Subsequent conve}7ances and encumbrances could be made, but which should be subsequent in time. Upon a failure to pay, the mortgage could be foreclosed, but the proceeds, after the payment of costs and all lawful prior charges, should be applied to the redemption at its par or nominal value, of said certificates. It will thus be seen, that although the words dividend and preferred stock are used, the whole transaction, taken together, shows conclusively, that these words are misnomers. Preferred stockholders are prior, only, over common stockholders. Warren v. King, 108 U. S. 389.
Now, in this case, a guarantee of the payment of 8 per cent, per annum, is secured by a mortgage, which also secures repayment of the full amount of money invested, and further provides that no mortgage or trust of any kind shall ever be created to the prejudice of these rights. This clearly takes .the matter out of the line of preferred stock, and gives to the holders of these certificates, rights which, it has been uniformly held, do not pertain to preferred stock or preferred stockholders, but to creditors.' The word “dividend” as used in this certificate, must be interpreted “interest,” and the words “preferred stock,” as “certificates of indebtedness.” This mortgage gives priority to the payment of the holders of these certificates, over other creditors of the corporation and this is inconsistent with the rights of a stockholder. “ Shares of stock give the holder a fixed right in the division of the profits and earnings of a company, so long as it exists, and of its effects, after the payment of its -debts, upon its distribution.”
Burrall v. Buchwick, R. R. 75th N. Y. 226; Kent v. The Quicksilver Mining Co., 78 N. Y. 176; Corcoran & Riggs v. Powers, 6 Ohio St. 130; Burt v. Rattle, 31 Ohio St. 116.

Opinion:
Spear, J.
The question in the case is, whether the Certificates are certificates of stock or certificates of indebtedness? If jTe_former, then, inasmuch as the company is an Ohio corporation, and itself pays taxes in this state upon its capital stock, these certificates are notjtaxable; if the latter, they aiejaxable as credits.
The relation of a'holder of preferred stock is, in some of its aspects, similar to that of a creditor, but he is not a creditor save as to dividends after the same are declared. Nor does he sustain a dual relation to the corporation. Hé is either a stockholder or a creditor; he cannot, by virtue of the same certificate, be both. If the former, he takes a risk in the concerns of the company, not only as to dividends and a proportion of assets on the dissolution of the compan j, but as to the statutory liability for debts in case the corporation becomes insolvent; if the latter, he takes no interest in the company's affairs, is not concerned in its property, or profits as such, but his whole right is to receive agreed compensation for the use of the money he furnishes, and the return of the principal when due. Whether he is the one or the other depends upon a proper construction of the contract he holds with the company. It is said that "a mortgage creditor, although denominated a preferred stockholder, is a mortgage creditor nevertheless; and interest is not changed to dividend by calling it a dividend; " " the question is not, what did the' parties call it, but what do the facts and circumstances require the court to call it." The aptness of this language arises in a case where it has been determined that such holder is a creditor; it may not furnish material aid in ascertaining the fact whether he is such or not. However, what the parties in the given ease have called the subject of the contract is of no little significance in determining their purpose, and, when that purpose is ascertained, it is of much importance in giving construction to the contract. The object of all rules of construction is to arrive at the meaning of the parties. What was the object to be accomplished ? What did the parties intend, and are the means taken in harmony with that intent, and with the law applicable to the subject ? These are questions addressed to the court in this case, and when answered the case is decided.
As supporting the claim that it was not stock that was issued but certificates of indebtedness, special attention is called in argument to those portions of the certificates which provide that holders shall not vote upon them at any meeting of the holders of the capital stock of the company; that the rights of the holders to the dividends are guaranteed, and are to be secured by mortgage on the property, rights and income; that no further or other mortgage shall thereafter be made to the prejudice of the holders of the preferred stock; that the dividends are guaranteed by The Cincinnati, Hamilton & Dayton company, which company had executed a mortgage to Stanley Matthews, trustee, to secure the payment of dividends.
As to some of these provisions it may be conceded that they are consistent with the idea that a debt was being created, but does it follow that they are inconsistent with the opposite view ? While each part of the contract should be considered by itself, yet the several parts should be construed together, and the intent gathered from a consideration of the whole.
The stockholders of the company undertook to provide means for the. redemption of its bonded debt, under and by virtue of the provisions of the act oFA'prilA6, lSJO^^Their resolution of December 22, 1870, indorsed on the back of the certificates, so declares, and the provisions of the act are thus made, in effect, a part of the certificates themselves. It therefore becomes important, at the outset, to understand what that act contemplated, and what it authorized. The declared purpose, as shown by the title, was "to enable-railroad companies.to.xede,em theirJbonded debts." To "redeem" is "to purchase back; to regain, as mortgaged property by paying what is due; to receive back by paying the obligation; " so the means authorized to be provided by the act were to be used to enable railroad companies, not to exchange one form of security for another, but to fay their bonded debts, and this object was to be accomplished under the act by.the issue of stock. This is apparent because: (1) the term stock is used, and no term inconsistent with that word is used to describe what may be issued; (2) the action of the stockholders, is to be invoked to determine whether stock, and stock alone, shall, or shall not be issued; (3) dividends are provided for, and not interest; (4) payment of such dividends is limited to the surplus profits; and (5) because the abstract required, which is to show, by copies, the time for which, and the papers in which, notice of the stockholders' meeting was given, and to show the total amount of the pre-existing stock and the amount of the preferred stock authorized, and is to have attached the affidavit of the president and secretary, is to be filed in the office of the secretary of state, the office which, by general law, is the designated place for the filing of all certificates of incorpo rations organized within the state, and where the same are to be recorded for the information of the public. These provisions seem entirely inconsistent with the idea that certificates of indebtedness might be issued under this act, and show that the certificates intended to be authorized, and in fact authorized, were certificates of stock only. The action of the stockholders, and the filing of a certificate in the office of the secretary of state, here provided for, are substantially the steps necessary by a corporation to obtain either an increase or decrease of its common stock, (sections 3262, 3264, Rev. Stats.,) and this act but provided a plan for increasing the company's stock by the issue of preferred stock to enable it to pay off its bonded debt. It was not a scheme for the extension or refunding, of a debt, nor for the paying of an old debt by the incurring, of a new one.
The certificates issued are in the line of this purpose, and their terms are not necessarily inconsistent with it. They purport to be certificates of stock. They certify that the holder is the owner of shares of stock of fifty dollars each; that it is transferable only on the books of the company in person or by attorney on surrender of the certificate; that the stock is issued in pursuance of the act, and provide for payment of dividends upon the stock, but make no provision for the payment of the principal sum advanced. The certificates were the natural sequence following the resolution of December-22,-18.70,indorsed on the back thereof. That resolution in terms assumes to proceed under and by virtue of the provisions of the act. It creates and authorizes the issue of a preferred stock. The shares are to be fifty dollars each, and the dividends thereon are to be payable quarterly at the rate of eight per cent, per annum, on the par or nominal value thereof. It further stipulates that the holders"oltbe certificates of stock shall not have or exercise,The..right to vote, the same at .the meeting of the stockholders of the company, thus indicating that it was stock theyjmtended to authorize the issue, of andmot certificates of- -indebtedness, for. the inhibition against voting would be wholly useless had it been intended that the holders should become creditors. The^grpyisiomis not.unusual. It is some times found in the statute itself. See act of May 5,1877, 74 Ohio L. 183. Nor is it, in this instance unreasonable. The promise to the preferred stockholders was to award them the first net earnings, the holders of the common stock to share in such of the net earnings as they might, by good management, be able to make over and above the eight per cent. As the burden was upon the common stockholders, the power to manage might fairly be left with them. In any view, it is fair to treat the proviso as but an arrangement between two classes of stockholders which did not concern the public. It is true that one characteristic of stock generally is that it can be voted upon. But this is not essential. Indeed, instances may arise where it is good policy to prohibit the voting upon stock. Ryan v. Railway, 10 A. L. Ree. 263; Ex parte Holmes, 5 Cowen, 426; Railway Frog Co. v. Haven, 101 Mass. 398; State v. Hunton, 28 Vt. 594. And the point here is, not whether any question of public policy intervenes to make it improper for the preferred stockholders to possess a right to vote, but whether any such question intervenes to make it imperative that they shall have that right.
Nor did the stipulation guaran.teej.ng to .the holders_of the preferred stock, payment .of dividends^therepn -negative the idea that they were stockholders. Ityvas not a stipulation to pay dividen dslin. any, .event,J?ut_a stipMatinu^o_pj^i^lyAúr OTSúfplus profits, for the company must be presumed to have proceeded in view of the terms of the second section of the act referred to, and the general rule of law on the subject. That rule is that payment of dividends to preferred stockholders differs from such payment to the holders of common stock only in that they are entitled to dividends in priority to any dividends upon the common stock. Dividends to either are to come from one common source, to wit: from funds properly applicable to the payment of dividends, that is to say, net earnings. In the nature of things this must be so. As well might one member of a partnership be permitted to appropriate to his own use assets of the firm to the prejudice of creditors, as for a stockholder of a corporation to do it. A contract to permit this to be done would be contrary to pub lie policy and void. Pierce on Railroads, 124, 125; St. John v. Railway, 22 Wall. 136; Lockhart v. Van Alstyne, 31 Mich. 76; Taft v. Railroad, 8 R. I. 310; Railroad v. King, 17 Ohio St. 534. And now provision to the same effect is made by statute. 1 Smith & Benedict's Rev. Stats., 935.
It may not be easy to satisfactorily determine whatoffice the mortgage from The Dayton & Michigan Company to-holders of tire certificates to secure payment of dividends was expected to .perform, inasmuch as those holders, if stockholders, could not thereby be given priority over creditors, either then existing or those who became such afterwards. However, this consideration is hardly a sufficient reason for concluding that the giving of the mortgage implied a purpose to change the apparent status of the holders, though not entirely inconsistent with such purpose. If in giving it, the intention was to treat the holders as creditors, we are at a loss to account for the absence of any provision fixing a definite time when the debtjKQprd'SpiireCand the creditors have a right to enforce a return of the principal sum advanced. And though the strixment, regarded.as made to_stoc_kholders,,was ineffectual to accomplish the most, usual purpose of a mortgage, yet it does not follow that it was a vain thing, especially when considered in connection with the agreement against the execution of a further mortgage. The Dayton & Michigan Company's road having been leased, and being then in the possession of the lessee, and being operated by it, a contract of record might have been, in the view of the company, important, in order to clearly establish the rights of the new stockholders, and the obligation of the lessee company to them, and for the information of the public, and this might as well be done by mortgage as in any other way. It may be added that so far from being inconsistent with the idea of an issue of stock, it is directly in line with it, inasmuch as preferred stock is itself a form of mortgage: 2 Redfield on Railways, sec. 237.
As to the guaranty of The Cincinnati, Hamilton & Dayton Company, had it been absolute and unconditional, it is difficult to see how it could change the character of the issue, or be antagonistic to tbe general purpose expressed by the certificates. But its agreement with the preferred stockholders was, at best, only a collateral undertaking, and could not rise higher, in obligation, than the original.
The stipulation that no mortgage should thereafter be made to the prejudice of the holders of the preferred stock, does not, under the circumstances, seem out of harmony with the general purpose. The proceeds from the disposition of the preferred stock was expected to relieve the company of its mortgage debts, and as its road was being operated by a lessee, the incurring of general debts or expenses would not be necessary. In such case a stipulation against further mortgage debts would not be without its use inasmuch as it would tend to give added value to the certificates in the market; nor would it be, from any standpoint, inconsistent with the end to be accomplished. At all events it was clearly a matter concerning which the parties interested might, as stockholders, lawfully contract. Besides, this provision, as it seems to us, indicates that it was intended to treat these holders as stockholders rather than creditors, for, if they were the latter, the lien of their debts was to be fully secured by the mortgage, and no subsequent mortgage could prejudice them; while if simply stockholders, though entitled to a preference, the company might so encumber its property by subsequent mortgages, as to make payment of preferred dividends impossible. And no reason is perceived why this agreement might not, with propriety, be carried into a mortgage, if made to preferred stockholders, though it might.excite surprise if found in a mortgage to creditors, for a covenant in a mortgage, executed to secure payment of a debt, that the debtor would never give another mortgage on the same property, would be an anomaly.
To construe the act of April 16., 1870, as authorizing the issue of the certificates of indebtedness, in the guise of stock, would be to impute to the general assembly that enacted it bad faith, which is not permissible; and to hold that the stockholders, by their resolution of December 22, 1870, and the company, by the certificates issued on the authority of that resolution, intended to issue evidences of debt, though in the form of certificates of stock, is to convict the parties of an attempt to obtain property under false pretenses; for if stock was issued which, in law, became part of the capital stock of the company, the power to issue it was undoubted, and, being non-taxable, was likely to prove of high value in the market, and to so continue as long as the company's affairs were pros? perous; while if certificates of debt were issued, they were of much less value because of being taxable in this state the same as other credits, and because of a doubt as to the power of the company to issue certificates in the amount and bearing the rate of increase authorized by the resolution. A court will hesitate long before making so damaging, and, under the circumstances, so improbable an imputation. The conclusion seems clear, that the purpose was to issue stock and not evidences of debt. It also seems that the purpose was not inaptly expressed in the form of certificate adopted and issued, and that to justify a holding which will defeat that purpose, a court should be fully satisfied that, treating the transaction as a whole, a debt was, in fact, created.
But it is further objected that the issue cannot be treated as an issue of stock because additional provisons to be found in the lease and in the mortgage, taken in connection with the provision in the certificates against voting, and for the giving of a mortgage by each of the companies, stamp the certificates with a rate of dividends as an absolute and continuing obligation, payable in any event; and hence, notwithstanding that the issue of stock is authorized by the act, and that the word stock is used to describe the issue in the • certificates, they are in reality certificates of indebtedness; that otherwise there would have been no object in inserting the above provisions in the certificates, or in executing the mortgage.
To these objections, so far as not hereinbefore considered, it may be answered, that the stipulation of The Cincinnati, Hamilton & Dayton Company to pay the dividends on the preferred stock in the lease is an undertaking wholly between the two railroad companies, and there is no proviso in the mortgage by that company that it will pay such dividends independent of the agreement of The Dayton & Michigan Company to pay. On the contrary, the covenant is, that the former company promises that the latter will and does guarantee to the holders of the shares of the preferred stock, as and when they become due, according to the terms of the certificates thereof, the payment of the dividends thereon, and the right to enter upon and sell by the trustee is upon like condition. Here is not, then, an agreement with the preferred stockholder by The Cincinnati, Hamilton & Dayton Company to pay dividends in any event, but only that The Dayton & Michigan Company shall pay the same as and when they become' due, according to the terms of the certificates. This, as we have already found, means payment out of net earnings, and not otherwise. It seems plain, then, that this provision of the mortgage, in no way enlarges the obligations of either company to the holders of the preferred stock.
The authority given by the mortgage to the trustee, in case of default, to enter into possession and operate the road, would, as between the preferred stockholders and the holders of the common stock, amount to no more than an assumption of control by the former by reason of the inability of the latter to so manage the business as to comply with the company's agreement to pay dividends to those entitled out of the net earnings, a proceeding which would be neither unjust nor illegal, and affords, as we think, no ground for assuming that the stock was thereby converted into a debt. The option to foreclose given to the trustee was but a mode provided-for the winding up of the affairs of an insolvent corporation .in place of the ordinary way, by authority of a court of equity, on petition of stockholders, through the agency of a receiver; while the power to distribute proceeds first to the preferred stockholders to the amount due as dividends and then the face value of stock after satisfying prior lawful charges, was an arrangement which stockholders, as between themselves, were competent to make, and which might, with as great propriety, be made between stock holders as between company and creditors. Any question arising upon this provision would concern only, and be settled . between, stockholders of the two classes. While, in the absence of statutory provision, or agreement otherwise, the preferred shareholder, in the distribution upon a dissolution of the corporation, becomes a common shareholder, yet when a preference as to capital has been expressly contracted for, it is otherwise. Cook's Stock, etc., section 278; McGregor v. Ins. Co., 33 N. J. Eq. 181. In this view, the term " prior lawful charges " will be held as not here used in any technical sense, or importing legal liens upon the property and franchises of the company, but rather in the general acceptation of equitable claims, which, proper steps being taken therefor, may be charged thereon. As against stockholders, general debts of the company may be treated as lawful charges to be paid from the assets prior to distribution among stockholders.
The proviso in the mortgage for the sale or exchange of the certificates at such rate, that the total amount of the dividends should never exceed, in the aggregate, the aggregate interest at that time (Dec. 22, 1870,) payable on the outstanding mortgage bonds, seems upon its face, to afford some ground for the claim of counsel that it was made in order to limit the issue so as to bring it within corporate capacity to pay interest, i. e. within the limit to which, by section 3287, Revised Statutes, railroad companies are confined in agreements for interest on bonded debts, and the farther claim that this points to the conclusion that the certificates were really intended for and understood to be certificates of indebtedness. But we can hardly give to this provision the importance claimed' for it by the learned counsel, and it is our duty to reconcile it with the avowed purpose, construed in the light of the other parts of the transaction, if this can reasonably be done. It may fairly be supposed that the rate of dividend (eight per cent.), was adopted to attract purchasers and induce the holders of seven per cent, bonds to take the certificates in payment, and then, in order that the burden which at that time rested upon the lessee company, by reason of the lease, to pay the interest on the bonded debt, should not be increased, the provision was made that the dividends should not exceed, in the aggregate, the aggregate interest on the' bonds. At least this explanation seems reasonable. Even if it be conceded that this clause is not consistent with the expressed purpose of the resolution of the stockholders as to some of its features, that. concession but raises the question which of two or more inconsistent clauses shall prevail. This proviso, in conjunction with the one giving authority to enter into possession and operate the road, and to foreclose and distribute proceeds to preferred stockholders, and other circumstances referred to, may be evidence of a loan, but of themselves are not, we think, of sufficient weight to warrant the conclusion that, that which purports to be stock is not really stock.
We would be content to rest the decision on the foregoing. But, in addition, it may be suggested, arguendo, whether, if the contention of counsel is correct, this entire transaction was not unwarranted in law. Such an interpretation should not be accepted if it can fairly be avoided. It is a recognized rule of construction that where a contract is susceptible of two constructions, one of which would make it legal and valid, and the other illegal or invalid, preference will be given to the former, and the contract construed, if possible, so as to make it lawful, reasonable, and operative. This company was organized under a special act passed March 5, 1851, by which its authorized capital was placed at $3,000,000. As to its power to execute mortgages it was governed by the provisions of the act of February 11,1848, which gave authority to borrow money not exceeding its authorized capital, and pledge the property and income of the corporation, limiting the rate of interest to seven per cent, per annum, and the form of indebtedness to that of bonds and promissory notes. Now, the project, as we have seen, contemplates an issue of $3,700,000, a sum much in excess of the authorized capital, and in the form of certificates of preferred stock. Under the act of April 16,1870, this might lawfully be done, but if the claim of counsel be correct, how can we escape the conclusion that the whole transaction, being not only unauthorized by the charter, but in direct violation of its terms, was beyond corporate capacity, and invalid ? The corporation itself would doubtless be es-topped to deny its validity because it had received and been benefited by the creditor's money, and probably the common stockholders because of ratification and acquiescence. But, in case an issue should arise between subsequent creditors holding claims founded upon transactions clearly within the corporate powers and those relying upon the contract beyond its powers, it would seem clear that the former claim would be preferred, and the latter, for the reasons stated, held to be invalid. And, without doubt, the circumstances would justify the attorney general, in the name of the state, in instituting proceeding in quo warranto against the corporation.
By the recitals in the mortgage it appears that, at the date of that instrument, the bonded debt of The Dayton & Michigan Company exceeded the amount of its authorized capital stock. How this was brought about we are not concerned to inquire. That it was so may have afforded a powerful motive inducing the company to take effective means to redeem the bonded debt, and thus relieve the company and its creditors of the embarrassment incident to that situation.
But whether the construction we incline to place upon this mortgage is correct or not, the result, we think, must be the same. Of more importance than the construction of the provisions of the mortgage, or the determination of whether or not those provisions are, in all particulars, at one with the language of the certificates, is the controlling consideration, paramount to all others, that the expressed purpose and object of this transaction was to pay a bonded mortgage deb,t by the issue of stock under a law which gave unquestioned authority for such issue. The power given by the stockholders was to execute a mortgage in pursuance of the resolution, and not inconsistent with the act. The company held out to the world that it was proceeding under that resolution and within the terms of the statute. If there is irreconcilable difference between the certificate and resolution, and the mortgage (which we think there is not), the latter must give way, and the former be held to control. The incident cannot overbear the principal.
It is urged that preferred stock is not capital stock within the meaning of the section (2746 Rev. Stats.), which authorizes the holders of shares of the capital stock of any company the capital stock of which is taxed in the name of the company to omit such shares from their tax return, and hence is not exempted from that section. It is true that the funds arising from the sale of the certificates did not enter into the original purchase of the property which the corporation itself was required to list for taxation. But the property of the corporation was pledged for payment of the bonded debt, and, in a sense, that debt reduced the value of the property. This debt was, to the extent that the preferred stock was disposed of, wiped out by exchange for, or the proceeds of the certificates, and the company's interest in the property was rendered, by that amount, more valuable. The same result, in the contemplation of the statute, was reached as though there had been an increase of the common stock, and the funds thus acquired, had been applied in discharge of the bonded debt.
We do not question that the rule of exemption is to be strictly construed, but where the purpose authorized, and the purpose declared, is an issue of stock, and not -the creation of a debt, the proof that such purpose has failed and that a debt has, after all, been created, should be clear and convincing. In this case, to our minds, it is not so. We are of opinion that, under the facts and circumstances of the case, these cértificates are certificates of preferred stock, and not certificates of indebtedness; that they are shares of the capital stock of The Dayton & Michigan Railroad Company, and that, inasmuch as the company pays taxes in this state on its property, the shares are exempt from taxation.
The cross-petition will be ordered dismissed, and judg ment rendered for plaintiff.
Judgment accordingly.