Court Opinion

ID: 8776704
Source: CourtListenerOpinion
Date Created: 2022-11-26 13:04:36.584508+00
Date Added: 2024-06-11T17:02:36.683138
License: Public Domain

KELLER, District Judge
(dissenting). I am strongly of the opinion that the decree of the Circuit Court should be affirmed.
. It is beyond question, in my judgment, that all the proceedings under which the preferred stock in this case was issued contemplated that the holders thereof should have and possess a lien on the assets of the company. All of the proceedings recited in the record bear witness to this.
In the agreement entered into between the Bondholders’ Committee of the' Baltimore & Eastern Shore Railroad Company and Mr. John E. Searles, found on page 93 et seq. of the record, the first paragraph of the agreement proper is as follows:
“Eirst. The party of the second part undertakes and agrees to purchase and acquire the properties of the Baltimore and Eastern Shore Railroad Company and the Choptank Steamboat Company and to consolidate the same with the properties of the Maryland Steamboat Company and the Eastern Shore-Steamboat Company and for that purpose to organize a corporation under the laws-of: the state of Maryland to acquire and take over and operate all of said properties to be consolidated thereunder. The corporation so to be..formed shall have $1,000,000 of common stock and shall have an issue *537of .$1,500.000 of cumulative five per cent, preferred stock and shall issue .$1,-250,000 forty year five per cent, gold bonds secured by a mortgage of all Its franchises and property, the lien of which shall he arranged to he superior to that of the preferred stoeh.” (Italics mine.)
It is to be observed that the agreement provided for the formation of a corporation under the laws of the state of Maryland, and that said corporation should have “an issue of $1,500,000 of cumulative five per cent: preferred stock.” The certificate of incorporation of the Baltimore, Chesapeake & Atlantic Railway Company, organized in accordance with this agreement, is found on pages 18 and 19 of the record, and simply provides for a capital stock of $1,000,000.
This stock was issued to Nicholas P. Bond and associates in part payment for property valued at $3,500,000 sold to the company by said Bond and associates, and said Bond and associates offered to take for the balance due them “either $1,500,000 of the 5 per cent, mortgage bonds, at par, or an equal amount of a preferred stock entitled to a cumulative preference of 5 per cent, out of the profits of the corporation.” (Record, p. 165.)
When this offer was made at the meeting of stockholders held on 3d of August, 1894, the following resolution was offered and unanimously adopted (Record, pp. 165, 166):
“Resolved that having considered the proposition made by Nicholas I’. Bond to receive in full payment of the balance due, either one million, five hundred thousand dollars in five per cent, bonds of this company at par, or one million five hundred thousand dollars in five per cent, cumulative preferred stock at par; and being advised that this company has power to make and issue bonds in such amount or amounts as it may deem expedient, and that it has power to issue preferred stock in place of issuing the said bonds,
“Resolved that this company do issue to Nicholas P. Bond in full payment of purchase money due him, one million five hundred thousand dollars of cumulative five per cent, preferred stock, and that certificates therefor be drawn in such form as shall be approved by counsel of this company and accepted by the board of directors.”
That the stock thus provided for was intended to be issued and was issued under the provisions of existing law, and was understood to have and did have a lien upon the property of the corporation, I think is abundantly shown by the facts: First, that at a meeting of the stockholders held on the following day (September 1, 1894) it was thought necessary to get the unanimous consent of the holders of every share of preferred stock, to the execution and delivery of “the mortgage submitted to us, with the full understanding that the same is and shall be a first lien on all the property of the Baltimore, Chesapeake & Atlantic Railway Company now held by it or hereafter to be acquired”; and, second, that it was thought necessary to get like unanimous consent to the following resolution:
“Resolved (2) that we do agree that in each certificate of preferred stock now or hereafter issued there shall be stamped or inserted substantially the following words: ‘This stock is subject only to the prior lien of a mortgage dated this first day of September, 1894, executed to secure twelve hundred and fifty, one thousand dollar, first mortgage five per cent, gold bonds, and the renewals and extensions thereof.’ ”
What do these provisions mean if they do not mean that the agreement made by the common stockholders contemplated that this pre*538ferred stock should have the lien provided for by the statute? If it did not have a lien, no unanimous consent was necessary for the issuance of the mortgage bonds; nor was there any propriety or purpose in inserting in the certificates that “this stock is subject only to the prior lien” of said mortgage. If the stock was not to have a lien, why .use the expression “prior lein” ?
These questions invite an examination of the statute of Maryland in, force at the time, applicable to the issue of preferred stock “in: place of bonds” by_a company all of whose authorized capital stock was then issued and outstanding.
This stock was issued under the provisions of section 408 of article 23 of the Maryland Code. This must be true because, having all of its authorized capital stock already issued and outstanding, it was only by virtue of that provision that the company had any authority to issue additional stock of any description, and the stock so issued had to be of the description mentioned in that section. One of the attributes of the stock therein provided for is that:
“Tlie said preferred stock shall be and constitute a lien on the franchises and property of such corporation, and have priority over any subsequently created mortgage or other incumbrance.”
In the light of this provision, and in view of the fact that this stock was authorized on August 31, 1894, the necessity for the agreement of September 1, 1894, by these stockholders to subordinate their lien to that of the $1,350,000 mortgage of that date, becomes readily understood. But for that agreement the lien of the stock would have had priority over that of the mortgage as to any one with notice.
And here we come to the only purpose and use of the provision in the Maryland statute for the execution, acknowledgment, and recordation of the corporate agreement under seal therein provided for. As against the corporation and all its common stockholders the agreement and the issue of the stock affords all the remedy needed; but as against subsequent .lien creditors this provision of the law is important to be carried out, and that was the purpose of this bill.
That the failure to acknowledge and record the agreement provided for in the Maryland law was either the result of an oversight or of barefaced treachery will not admit of a doubt. That stock carrying a lien only inferior to that of the $1,350,000 of first mortgage bonds was the consideration for which the company was to receive, and did receive, the property of the Baltimore & Eastern Shore Railroad Company and the Choptank Steamboat Company, valued at $2,500,-000, is shown by the original agreement for the consolidation (page 94, Record),‘as well as by the actual steps taken thereafter by the company when organized.
If I am correct in my strong conviction that all the evidence in the case shows that the contract for the issue of this preferred stock contemplated stock clothed with all the attributes of the Maryland statutory preferred stock, then I cannot see how the presence in this suit' of any common stockholders is eith,er necessary, or indeed even proper. The action of the company in whatever it did agree to do was corporate action, assented to by the holder of every corporate *539share of its common stock, and every such stockholder and the subsequent transferee of every such holder is bound by what was then lawfully agreed to. Indeed, the authorities go much further than this. See the discussion in Clark & Marshall on Private Corporations, §§ 563, 569, 570, and cases there cited.
The fact is that this statutory so-called preferred stock is entirely governed by the statute, and the holders of it occupy, in some aspects, the relation-of creditors of the corporation.
In the case of Heller v. Marine Bank, 89 Md. 602, 43 Atl. 800, 45 L. R. A. 438, 73 Am. St. Rep. 218, Chief Judge McSherry, discussing the changes introduced by the amendment of 1880 (Acts 1880, c. 474), declares that the new law had radically changed what had formerly been described as “preferred stock” under the statute of 1868 (Acts 1868, c. 471), and had clothed it with different attributes. He says:
“Preferred stock, under the act of 1868, had no lien whatever; this statutory preferred stock under the act of 1880, ‘the said preferred stock,’ has a lien on the franchises and property; preferred stock under the act of 1868 had no priority over creditors; this statutory preferred stock, under the act of 1880, has priority over subsequent mortgages and incumbrances.”
See section 417 C, Clark & Marshall on Private Corporations, in which this statute is discussed as well as the case of Heller v. Marine Bank. The authors conclude:
“Such stock is not ordinary preferred stock, nor, technically, is it preferred stock at all, and, therefore, it is not governed by the ordinary rules. It is sui generis, and the rights of the holders are determined by the statute.”
On this branch of the subject 1 cannot do better than to quote from the opinion of the learned judge of the Circuit Court:
“The stockholders are constructively here when the corporation is here in court. It is not attempted to have the court decree in derogation of their rights, but it is attempted to decree that the corporation did agree and was bound at the inception of its existence to execute an agreement under seal and duly acknowledged guaranteeing certain rights to purchasers of or subscribers to such preferred stock. Statutory preferred stockholders are entitled to this muniment of title because, under the Maryland statute, it is made the duty of every corporation issuing preferred stock under the provisions of the statute to execute it, and the failure of a corporation to furnish it is a failure of the corporation to do what the law enacts it shall do.
‘There may be issues of preferred stock to which this provision of this law is not applicable. But that is in derogation of rights given by the statute, and it must be made to appear that such was the agreement of the parties; but in this case, on the contrary, all the evidence tends to show that in the inception of this corporation it was the intention and design of the parties who promoted it that they should buy the property and should pay for it by the issue of mortgage bonds or preferred stock and by the issue of common stock, so that it was part of the original intention of the parties promoting the organization of this company that this preferred stock in lieu of so much of mortgage bonds should issue, and it was to be issued in conformity with the law given by section 408 of article 23.”