Jefferson Banking Co. v. Trustees of Martin Institute , 146 Ga. 383 ( 1917 )

Hill, J.

(After stating the foregoing facts.)

1. On the call of the case in this court the defendants in error made a motion to dismiss the bill of exceptions, upon a number of grounds. They -insist that the plaintiffs in error, claiming to be creditors of the Jefferson Cotton Mills, filed an answer to the interventions of the Martin Institute and the Methodist Church, and that the interventions and answers thereto made two separate and distinct cases before the court. Only one verdict was rendered and one decree taken in the case. One motion for new trial was made and one brief of evidence was filed and approved. One bill of exceptions to the order of the court overruling the motion for new trial was made. One bill of exceptions pendente lite to the order overruling the demurrer to each intervention was taken. It is insisted that there were two cases being tried, and that there should have been two motions for new trial, two briefs of the evidence, two bills of exceptions, and two bills of exceptions pendente lite, and that there are not sufficient parties defendant, etc. There is no merit in the motion to dismiss. It is true that generally all parties interested in the litigation should be made parties to proceedings for equitable- relief. Civil Code (1910), § 5417. But, “where there is one common right to be established by or against several, and one is asserting the right against many, or many against one, equity will determine the whole matter in one action.” Civil Code, § 5419. And see Benson v. Shines, 107 Ga. 406 (33 S. E. 439); Civil Code, § 4600. There was but one main issue in the case, namely, whether the certificates of stock were “preferred stock,” or were “certificates of indebtedness” creating a lien on all the defendant’s property as against creditors who were parties. The agreement of the parties on the trial was in part as follows: “That the judge direct a verdict as he may determine the verdict should be under the law and evidence.” One verdict was rendered and one decree taken, and we think it was sufficient that one motion for new trial, one brief of evidence, and one bill of exceptions should have been filed. Two motions would have been permissible, but were not necessary. The court below did right in refusing to dismiss the motion for new trial, and we likewise refuse to dismiss the bill of exceptions.

2-4. The Jefferson Banking Company brought an equitable petition against the Jefferson Cotton Mills, to recover the amount due on an unsecured promissory note, and alleged that the defendant was insolvent. A receiver to take charge of the assets of the defendant was prayed for, and one was appointed. The trustees of the Martin Institute and the trustees of the Methodist Episcopal Church South,, of Jefferson, both filed interventions, alleging that they had a first lien on all of the property of the Jefferson Cotton Mills, as well as on its income, superior to all other liens and debts of creditors of the corporation, and prayed that they be first paid by reason of the lien created by the alleged “certificate of indebtedness,” as they denominate the instrument, a copy of which is set'out in the statement of facts. These interventions were allowed by the court. And all other creditors of the corporation, so far as known, were made parties to the suit. All the creditors, who were parties demurred to the interventions, on various grounds. The demurrer was overruled by the court, and the creditors excepted pendente lite. The case went to trial; but in our view we need proceed no further than to a consideration of the exceptions to the overruling of the demurrer, one ground of which is that the interventions as amended show on their face that the respective intervenors were only “preferred stockholders,” and hot creditors of the cotton mills. Another - ground is that the proceeding on the part of the intervenors is an effort to change all the terms of the written contract by parol evidence, without alleging that there was any fraud, accident, or mistake in the execution of the contract, etc., and that where they undertake to allege mistake they do not allege how it occurred or in what way the mistake was made. The certificates issued to the intervenors are both alike, except as to names and amounts, and both will be treated as one. The main question in the case is whether the instrument of writing which is the basis of the interventions is “preferred stock,” as it purports to be by its terms; or whether it is a “certificate of indebtedness,” creating a lien on all the property of the cotton mills, superior to all other liens and the claims of all general creditors of the corporation. The certificate by its terms recites that the school trustees “are the owners of 260 shares of. fully paid-up preferred stock in the Jefferson Cotton Mills.” It further recites,, that “this stock is sold at one hundred dollars per share, and is preferred,” etc. It provides for the payment to the holder, out of the income or earnings, of a cash dividend of 6% per annum, and “to secure the payment of said dividend semi-annually, as well as the principal,” the Jefferson Cotton Mills binds and pledges to the holders of the certificates “and gives to them a first lien on all its property, be [it] real, personal, or mixed, that it now has or may at any time hereafter own,” etc. It also provides that no preferred stock shall be issued except that issued to the intervenors. The right to vote or to' participate in the management of the cotton mills is waived, “except a right to vote qn a question of amendment of the charter of the same.” “This stock is transferable on the books of the company by the holder only, or his authorized attorney.” Throughout the certificate it is denominated as “preferred stock,” and it is significant that when the interventions were first filed the intervenors evidently thought they owned preferred stock; for the petition alleged that they owned “fully paid-up preferred stock” in the mills, and that under the certificates they had a first-mortgage lien upon “all the property of the Jefferson Cotton Mills,” etc. It was only when the interventions were amended that the word “stock” wherever it occurred in the petition was stricken, and the words “instrument of writing” were substituted therefor, in an effort to reform the contract from a certificate of preferred stock into a mortgage indebtedness. But we do not think the instrument, which is clearly on its face a certificate of stock, can, under the allegations of the petition, be so reformed as to make- it a mortgage. Indeed to do so would be, not to reform it as a mortgage, but to create a mortgage debt for the parties, which this court can not do. It may be that the trustees of the church and school thought, at the time of the execution of the contract and subsequently, that the certificate of preferred stock created in their favor a lien upon the property and assets of the corporation, superior -to the claims of the corporation’s creditors; but if they were misled into so thinking, it is their misfortune. They chose their present position by their own voluntary "contract which they entered into a number of years before this suit was brought, and presumably they have accepted the dividends on the stock from the corporation each year since and until its failure to meet its obligations. The powers of a corporation are fixed by law. It may, under proper legal authority and in the proper form, create an indebtedness. It may, under authorized powers -and limitations, issue bonds and secure their payment by liens created on its property, such liens being properly executed and recorded. It may issue common and preferred stock to its stockholders and issue certificates therefor; and when such certificates are properly issued, the owner and holder becomes a shareholder of the capital stock of the corporation, subject to the laws operating on such corporation and stock. But the issuance of such certificates does not of itself create an indebtedness against the corporation, nor make the stockholder a creditor. He is instead a joint owner of the corporation, and as such, in some jurisdictions, is liable to creditors of the corporation for. the amount of his stock and for additional amounts which may be fixed by statute. But,' in the absence of statutory authority, such certificates of stock can not become a lien upon the assets of the corporation, in preference to creditors of the corporation, as will be seen later in this opinion. We know of no such authority conferred by law on the corporation in the 'instant ease. In the absence of statutory authority to make this preferred stock a lien on the asset's of the corporation, we do not see how the equitable lien sought to be worked out by the intervenors can be made to operate against bona fide creditors of the corporation.

It follows from what has been said that the intervenors are not lien creditors in preferment to creditors of the corporation, as claimed by them, but they are merely preferred stockholders. The case of Savannah Real Estate &c. Co. v. Silverberg, 108 Ga. 281, 289 (33 S. E. 908), is relied on by the defendants in error; but the facts on which that decision rests are different from those in the present case. In the Silverberg case it was held that the instrument sued on was an evidence of indebtedness, and not a certificate of preferred stock. That case was decided upon- its own peculiar facts. It was a suit by the holder of the certificate against the maker, and did not involve the question whether the corporation could create a lien in favor of other stockholders as against creditors. Mr. -Justice Cobb, in delivering the opinion of the court, said: “The stipulation that the entire issue shall be ‘retired’ on January 1st, 1897, and that the company may ‘retire the same or any part thereof at any time after two years from date,’ upon giving notice of the character therein provided for, are stipillations indicating an intention to make a contract under which one party was to receive the money for use in its business and return the same in any event at a designated time, and earlier if desired, paying to the person whose money was thus used as interest thereon a certain proportion of the earnings made by the borrower in a given enterprise; the amount of interest thus to be paid for the loan of the money depending upon the success of the enterprise in which the borrower was to use the money.” It was also said in that case that “the question of whether the holder of a certificate issued by a corporation, or whether the certificate is simply evidence of a debt due by the corporation to the holder, is one that depends upon the peculiar facts of each case,” etc. See, in this connection, Coggeshall v. Georgia Land &c. Co., 14 Ga. App. 637 (82 S. E. 156). The case of Totten v. Tison, 54 Ga. 139, was also decided upon its own peculiar facts, which were different from those of the present case. It. is true, as said by Mr. Justice Lewis in Cook v. Equitable B. & L. Asso., 104 Ga. 814, 828 (30 S. E. 911), “It matters not what name is given to its obligation, whether stock, note, or bond; the nature of the transaction, whether it be a pure borrowing of money or not, is determined by the real substance and effect of the contract between the parties.” But, as pointed out above, the nature of the transaction in the instant case, as shown by the petition including the certificate itself, shows the instrument declared upon to be preferred stock, and not an evidence of indebtedness. Under the terms of the instrument, which is in the form of a certificate of stock, no time is fixed when the principal debt shall become due and payable; and unless this be done, it can not even create a debt. 13 Cyc. 393; Saleno v. Neosho, 27 L. R. A. 769-772 (127 Mo. 627, 30 S. W. 190, 48 Am. St. R. 653). The contract as written could go on indefinitely or until default in the payment of dividends. The holders of the certificates could not demand payment until default in the payment of dividends. There is no provision in the contract for paying off the intervenors and for the cancellation of the debt, if it was one, at any time. It does provide for the dividend to be paid semi-annually out of the “income or earnings” of the corporation. These facts and others patent upon the face of the instrument itself differentiate it from those cases where the instruments of writing were held to create debts-.

As we construe the instrument to be preferred stock and not a mortgage indebtedness, it is unnecessary to decide whether the description of the property alleged to be mortgaged is void for uncertainty. Nor is it necessary to enter into a discussion of the question raised as to whether the certificates were voidable at the time of issuance but were ratified by the subsequent acts of the corporation. We are treating the certificates, on demurrer; as valid and binding. Construing, .therefore, the certificates to be “preferred stock,” let us inquire whether they create a debt against the corporation and a lien on all its property, superior to the claims of creditors of the corporation. In Cook on Corporations (7th ed.), § 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 is paid 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 is paid. The relation of debtor and creditor does not exist between the preferred stockholders and the corporation, and the right to a preferred or guaranteed dividend is not a debt until the dividend is declared. A dividend is money paid out of profits by a corporation to its stockholders. A preferred dividend is nothing more than that which is paid to one class of stockholders in priority to that to be paid to another class.” The same author says, in section 271 of the same volume: “Formerly it was a matter of doubt and discussion whether or not a preferred stockholder had any rights as a creditor of the company, or was confined to his rights as a stockholder. 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 stock. . . An agreement of a corporation to pay the preferred stockholders before corporate creditors are paid is void. . . Occasionally a mortgage is given by the corporation to secure the payment of dividends on preferred stock, and to give it a preference in payment over subsequent debts of the corporation upon insolvency or dissolution. It is difficult to see how such a mortgage would be legal, unless it has been issued under express statutory authority. The courts have no power to give stockholders a preference over creditors, even though the preferred stock by its terms be a lien on the property.” In 10 Cyc. 370 (b), it is said: “The power to issue preferred shares does not include the power to make such shares a lien upon its property; the true conception of preferred shares being that they merely create a preference in the declaration and payment of dividends out of the income. For the creation of a lien upon the property of the corporation in favor of any one class of its shares there must be a direct statutory authorization,” etc. And to the same effect, see: 3 Thomp. Corp. (2d ed.) § 2262; 3 Words and Phrases (2d Series), 1136; Continental Trust Co. v. Toledo &c. R. Co., 72 Fed. 92; Warren v. King, 108 U. S. 389 (2 Sup. Ct. 789, 27 L. ed. 760).

5. Having construed the instrument sued on in this ease to be a certificate of preferred stock, and holding that it can not by being reformed, or of itself, make the owner and holder of the certificate a corporate creditor with a lien on all the property, of the corporation, superior to general corporate creditors, even if the stockholders intended to do so, in the absence of statutory authority, the trial judge erred in not sustaining the demurrer and dismissing the interventions in so far as they sought to have a lien created in favor of the holders of preferred stock, superior to general creditors of the corporation. See Warren v. King, supra.

Judgment reversed on the main bill of exceptions, and affirmed on the cross-bill.

All the Justices concur.