Penington v. Commonwealth Hotel Constr. Corp.

This is a proceeding to wind up the affairs of an insolvent corporation and to distribute its assets among the stockholders.

The Chancellor in the court below (ante p. 188, 151 A. 228) considered three questions:

1. The rights of stockholders who had purchased their stock from the corporation at a premium.

2. The rights of stockholders who had not fully paid for stock for which they had subscribed.

3. The rights of preferred stockholders to claim an amount equivalent to the unpaid cumulative dividends on such stock from the inception of the corporation, though there were no earnings or net profits to distribute.

The majority of the court held that questions 1 and 2 were correctly decided by the lower court. I agree with this conclusion and, therefore, will not consider either of these questions in detail.

The corporate enterprise was not successful and no net earnings or profits were ever realized from it. Because of that fact, no dividends were ever paid on the preferred stock.

It is, also, conceded that the fund now in the hands of the receiver, for distribution, was derived solely from capital assets, and in no sense from earnings.

Differing from the court below, the majority of this court have, nevertheless, reached the conclusion that the preferred stockholders are entitled to an amount equivalent to the unpaid cumulative dividends on their stock, from the time the corporation was organized, in preference to the holders of the common stock. I regret that I am unable to agree with this conclusion.

The particular provision of the charter, to be construed by us, is that part of paragraph E, which provides that "In the event of any liquidation, dissolution, or winding up of the corporation, or upon any distribution of its capital, other than the redemption of its preferred stock, the holders of the preferred stock shall be entitled to be paid in full the par value thereof, and all unpaid dividends accrued thereon, before any amount shall be paid or any assets distributed to the holders of the common shares."

A corporate charter is not only a contract with the State, but is, also, a contract between its individual stockholders, and in case of doubt as to the meaning of any particular clause or phrase, like any other contract, all of its provisions must be considered.

I concede that, generally speaking, the word "dividends" is not always used in the same sense, and, therefore, does not always have the same meaning.

In ascertaining the meaning of the phrase "and all unpaid dividends accrued thereon," as used in Paragraph E, we must, therefore, not only consider the usual meaning of that word, and of the word "accrued," used in connection therewith, but, also, whether other provisions of the charter, when read as a whole, throw any light on the sense in which these words are used in this particular paragraph.

Paragraph A, in part, provides that the holders of the preferred stock "shall be entitled to receive ____ out of the surplus or net profits of the business of the corporation in each year, dividends ____."

The cumulative provision with respect to the preferred stock immediately follows this provision, but as it appears in the statement of facts I will not repeat it here.

Paragraph B, in part, also, provides that "Whenever dividends at the rate of seven per centum (7%) per annum upon the preferred stock for all past dividend periods shall have been declared ____ the ____ directors if the remaining surplus or net profits be sufficient therefor, may declare dividends on the common stock ____."

Paragraph C further provides that "after the payment of the said preferential dividends of seven per centum (7%) per annum to the holders of the preferred stock and non-cumulative dividends of six per centum (6%) on the common stock, the Board of Directors shall set aside twenty per centum (20%) of the remaining net profits for any year as a sinking fund to be used in the purchase or redemption of the preferred stock ____."

Paragraph F, however, must not be overlooked. It provides that "The preferred stock shall be subject to redemption, in whole or in part, at the election of the Board of Directors, at any dividend date, at 110 per share, plus all unpaid, accrued or accumulated dividends thereon."

When this paragraph is read in connection with paragraph C, I think I may safely assume that it will not be contended that "the unpaid, accrued or accumulated dividends" referred to, were intended to be paid from capital.

After the words "In the event of any liquidation, dissolution, or winding up of the corporation, or upon any distribution of its capital," Paragraph E inserts the words "other than the redemption of its preferred stock." This provision would merely seem to be because the rights of the holders of such stock, as to both capital and undistributed profits, are clearly and specifically taken care of in Paragraph F.

I will consider the similarity of the language of the pertinent phrase in this paragraph with that used in Paragraph E and the significance of that fact at a subsequent stage of this opinion.

In considering the meaning of Paragraph E, it is apparent that the word "dividends" is used throughout the remainder of the charter in the sense of a distribution of surplus or net profits. In fact, this seems to be conceded by the majority of the court.

It is said, however, that Paragraph E "has no relation to the company as a going concern; it contemplates only the relation of stockholders inter sese after all creditors have been paid, and the remaining assets of the corporation are distributable to the stockholders."

Conceding that to be true, in view of the axiomatic rule that the context of the whole contract must be considered in determining the meaning of a doubtful clause, does this statement answer the question to be determined?

The holders of the preferred stock are entitled to such preferences and to such preferences only, as are given them by the charter of the company.

It is admitted by the holders of the common stock that the preferred stock has the preference both in the distribution of capital and the undistributed income thereon, but it is contended, and I think correctly so, that its preference extends no further.

If the meaning of the word "dividends" is clearly defined by the context of the charter, read as a whole, what is there to indicate that it is used in a different sense in Paragraph E? I find no satisfactory answer to this question.

Even if the words "unpaid dividends ____ thereon" stood alone and there were no other explanatory or restrictive words to consider, the rule of construction that ____ "a word, or phrase, repeated in a statute will bear the same meaning throughout the statute, unless a different intention appears" ____ would seem to apply. Lewis' Sutherland on Stat. Constr., Vol. 1 § 299;Silvia v. Scotten, 2 W.W. Harr. (32 Del.) 295,122 A. 513; Minority Opinion; State v. Highfield, 4 W.W. Harr. (34Del.). 152 A. 45.

True, the above citations relate to the construction of statutes or constitutional provisions, but the same rule applies with equal force to contracts.

As a matter of fact, W.J. Hall Co., Ltd., L.R. (1909), 1Ch. 521, is, apparently, an example of the application of this rule.

I appreciate the fact that this case was distinguished by the court in The New Chinese Ant. Co., Ltd., L.R. (1916), 2 Ch.D. 387; that the statement as to the meaning of the word "dividends" was treated as dicta in Re Springbok Agr. Est.,Ltd., L.R. (1920), 1 Ch. D. 563, and that both of these cases were approved in Re Dom. Tar and Chem. Co., Ltd., L.R. (1929), 2 Ch. D. 387. Notwithstanding that fact, the reasoning of the court in the Hall Case strikes me as being particularly persuasive.

The precise charter language in these cases will be considered later.

But because of the use of the word "accrued" in connection with the words "unpaid dividends ____ thereon," it is unnecessary to rely solely on the rule of construction above referred to.

Considered from this aspect, the phrase "unpaid dividends accrued thereon" is a very different phrase from "unpaid dividends thereon" and has a very different meaning. In order to come within its meaning the "dividends" referred to must not only have been "unpaid" but must, also, have "accrued."

The word "accrue" means: (1) To increase, augment; (2) to come by way of increase; to arise or spring as a growth or result, to be added as increase, profit or damage, especially as the produce of money lent, (Standard Dictionary; Webster's New International Dictionary); (3) to grow to; to be added to, as the interest accrues on the principal. Bouvier's Law Dictionary.

The word "accrued" means added as increase, accumulated, as interest or rent. (Standard Dictionary; Webster's New International Dictionary).

That the word "accrued" is synonymous with the word "accumulated" is, therefore, apparent. Revloc Supply Co. v.Troxell, 281 Pa. 424, 126 A. 774.

In fact, this seems to be admitted by the attorneys for the preferred stockholders. If these words are synonymous, the phrase "and all unpaid dividends accrued thereon" can be read as though it were "and all unpaid dividends accumulated thereon." When so read that the word "dividends" refers to undistributed net earnings or profits on the corporate capital, in which the preferred stock has preferential rights by other provisions of the charter, would seem to be apparent.

This conclusion as to the intent of Paragraph E is further strengthened by the fact that with the change of the word "and" to "plus," and the addition of the word "or" and of the synonymous and alternative word "accumulated," precisely the same provision appears in the redemption clause.

I have already called attention to the fact that that paragraph provides for the redemption of the preferred stock at 110 "plus all unpaid, accrued or accumulated dividends thereon."

As I view it, Paragraphs E and F were both drawn on the same theory and were intended to secure precisely the same rights to the preferred stockholders in any earned but undistributed income of the corporation.

Under this construction of Paragraph E, as there are no earnings in the hands of the receiver for distribution the preference of the preferred stockholders can only extend to the return of capital based on the par value of the stock.

Such was the conclusion of the court in Michael v.Cayey-Caguas Tobacco Co., 190 App. Div. 618, 180 N.Y.S. 532,533, where there were likewise no profits to distribute. In that case the language used in the dissolution clause was "and all accrued and unpaid dividends thereon."

As I view it, the English cases cited in the majority opinion have little or no bearing on this phase of the case by reason of the wording of the charters construed.

In The New Chinese Ant., Ltd., L.R. (1916), 2 Ch. D. 155, the charter provided that the surplus assets, among other things, should be used "in paying off arrears (if any) of the preferential dividend aforesaid."

In Re Springbok Agr. Est., Ltd., (1920), 1 Ch. 563, the language of the charter was identical with that used in theChinese Ant. Case, with the exception of the insertion of the word "the" before the word "arrears" and the omission of the parenthesis enclosing the words "if any."

In Re Tar Chem. Co., Ltd., (1929), 2 Ch. 387, the language used would seem to be even broader. It was ____ "all arrears of the dividend whether earned or declared or not."

In considering this case, the court said, however, that the clear language of the New Chinese Antimony and SpringbokCases was "not distinguishable from the one which I have to construe."

It is unnecessary to make any further comments on the charter language in that case but that the phrase "arrears of ____ dividend" is very different from the phrase "unpaid dividends accrued thereon" would seem to be apparent.

Mich. Law Revised Dec., 1930, p. 250.

In considering the English cases, we should also bear in mind that it has been held that a preferred stockholder is confined to a return of capital where the language of the dissolution clause is "together with any arrears of dividend due thereon at the date of winding up," etc. In re Roberts Cooper, Ltd., L.R. (1929),2 Ch. 383.

The only other cases that give any particular consideration to this question are Johnson v. Johnson Briggs, 138 Va. 487,122 S.E. 100, 101; and Drewry-Hughes Co. v. Throckmorton,120 Va. 859, 92 S.E. 818.

In the Briggs' Case, the charter language used was "and any arrears of dividends due and unpaid to it."

The Throckmorton Case seems to be inconsistent with my conclusion in this case as the charter provision was ____ "and the amount of dividends accumulated and unpaid thereon."

I, however, am unable to agree with the reasoning of that case. It is pointed out that the return on the preferred stock is limited by the charter of this company. That is true, but to give the holders of such stock the rights claimed by them where there are no earnings to distribute, and in view of the language used, would seem to be treating them as creditors, rather than as shareholders in the corporate venture. 34 Harvard Law Review, 303.

For the reasons above given, I am forced to the conclusion that the decree of the court below should be affirmed in its entirety.

I am, nevertheless, bound by the conclusion reached by the majority of the court. That being true, it is necessary for me to record my vote as to when the dividend calculations on the preferred stock shall cease. The majority of the court hold that such calculations shall cease on the date of the appointment of the receiver. Without stating my reasons for it, I agree with this conclusion.

RICHARDS, J., also dissented and concurred in the views expressed in the opinion of Judge Harrington.