Scott v. Baltimore & Ohio Railroad

The main question presented in the two cases contained in these records involves the right of the preferred stockholders of the Baltimore Ohio Railroad Company to share in the distribution in the net profits of the company that may be remaining after the appropriation of four per centum of the net earnings to the preferred stock. It is contended by the appellants that the preferred stockholder has not only the right to receive a dividend of four per centum out of the net earnings before any dividend shall be set apart for the common stockholders, but to share pro rata with the common stockholders in the distribution of the residue; or, as an alternative proposition, to share equally with the holders of the common stock in any part of the net earnings that may be distributable after the payment of a dividend of four per cent each to the holders of both common and preferred stock. The legal title to both kinds of stock, is now vested in trustees who hold it for five years, or for an earlier date in their discretion, with such powers and duties as are particularly described; and they have issued to the real owners of the shares "certificates of beneficial interest," which entitle the said owners to receive stock certificates for their shares when the time the said trustees are to hold it shall expire, and in the meanwhile to receive payments equal to the dividends collected by the trustees.

The persons holding these "certificates of beneficial interest" are therefore the real owners of the stock and for the purposes of this opinion we may so regard them.

The question as to the relative rights of these two classes of stock cannot be answered by regarding only the characterization of one of them as "preferred;" because of the fact that this term, standing alone, means only a stock that differs from other stock in having a preference of some sort attached to it, without expressing the special nature of the preference.

Ordinarily the term "preferred stock" is understood to designate such stock as is entitled to dividends from the income or earnings of the corporation before any other dividend can be paid. 1 Cook on Stockholders, sec. 267; Henry v. Great N.Railway Co., 1 De G. J. 606. But though this may be true, yet to determine in each case the special properties and qualities it possesses, resort must be had to the statute or contract under which it was issued. "Preferred stock takes a multiplicity of forms according to the desire and ingenuity of the stockholders and necessities of the corporation itself." It is a matter of contract Cook, section 269, or depends upon statute. Heller v. Marine Bank, 89 Md. 611.

It always, however, represents pro tanto the capital of the company, and has about it no elements or rights other than those that are conferred upon it by the statute or contract to the authority of which it owes its existence. In all other respects the preferred stockholder is upon the same footing as the common stockholder; he is not a creditor of the company; his stock represents the amount of his ownership in the capital; he may vote at the meetings of the company as the common stockholders may do, and in general terms do and perform such things and be subject to such obligations as the common stockholders are subjected to, except as the terms under which his preferred stock was issued, may preclude. Macintosh v. Flint, etc., R.R., 34 Fed. Rep. 582; Re Barrow, etc., 59 L.T.R. 500.

The rights of the preferred stockholders are in the same manner limited or extended. The preferred dividends may be made cumulative or non-cumulative; the dividend may be a fixed amount for each year to be paid out of earnings, or it may be a percentage, not exceeding a certain amount to be determined by the directors at their discretion; and the preferred stockholder who has received his preferred dividend may still have a share of the net earnings that may remain. These are all matters for the determination of which the statute or contract must be looked to. The whole doctrine on this subject was summed up in a few words by the LORD CHANCELLOR, when he said, in the case of Henry v.The Great Northern Railway Co., 1 DeGex Jones R. 636: "The expression `preferred shareholder' is equivocal. It by no means clearly indicates what are the rights of those to whom it applies. I do not think it can fairly be said to be an accurate expression, whichever of the two constructions be put upon it. All which the language fairly imports is, that some preference is given to the persons to whom the language applies. How far the preference is to extend must be ascertained by other media than the mere expression itself." Heller v. Marine Bank (supra),89 Md. 610; State ex rel., Thompson v. C. C.R.R. Co.,16 S.C. 530; Warren v. King, 108 U.S. 389; Kent v.Quicksilver Mining Co., 78 N.Y. 159; Elkins v. Camden A.R.R., 36 N.J. Eq. 236; Gordon's Extr. v. R.F. P.R.R.,78 Va. 501.

The solution of the question with which we are now dealing must depend therefore upon the construction to be placed upon the agreement of the parties as expressed in the stock certificates. That must be taken as the embodiment of the contract, and the final expression of the entire measure of the dividend rights of the parties. Greer v. Van Meter, 54 N.J. Eq. 270. Evidence therefore of negotiations which proceeded this final consummation of the agreement, or conversations as to the intentions of the parties, cannot be accepted, for the reason that all these are merged in the written instrument which must be taken to express the final intention. Bailey v. R.R. Co., 17 Wallace, 96;Cassard v. McGlannon, 88 Md. 168; Lazear v. Nat. UnionBank, 52 Md. 78.

But evidence of the situation of the parties, the objects and purposes for which the agreement was made, and, in a case like this, when it is important to decide whether the certificate contains the whole agreement, all the agreements and resolutions which preceded and authorized the issue of the stock, may be resorted to for the purpose, not of altering the contract, but of arriving at the real intention of the parties as expressed in the written contract. 1 Cook on Stockholders, sec. 269, and authorities cited in note. In Boardman v. Lake Shore M.S.Railway Co., 84 N.Y. 173, the Court said: "We think the whole proceeding relating to the issue of the stock may by taken in consideration as constituting one and an entire transaction. The resolutions were competent evidence to show authority to issue the stock; the proposal and other proceedings to carry out the purpose of the resolutions and the certificate as evidence of what stock was actually issued, and in part the terms upon which it was so issued. Altogether these papers evince what the intention was." St. John v. Erie Ry. Co., 10 Blatch. 271; affirmed in 22 Wallace, 136; Rogers v. N.Y., etc., LandCo., 134 N.Y. 197; B. O.R.R. Co. v. Brydon, 65 Md. 216;Chicago, etc., R.R. Co. v. Denver C.R.R., 143 U.S. 596;Mumford v. Memphis C.R. Co., 2 Lea, (Tenn.) 293; FirstNat. Bk. v. Gerke, 68 Md. 456.

But apart from this general principle which seems to be well established as we have stated, it is not important in this case, from the fact that all the instruments of writing relied on are connected together by reference one to the other. The certificate "of beneficial interest" and the certificate of stock refer to the resolutions of the company adopted on 14th April, 1899; these to the "proposition made by Mr. Voorhees," and this to the plan and agreement of reorganization, etc. So that a purchaser of a certificate of stock or of "beneficial interest" therein has had full notice of all these instruments of writing. They should therefore be regarded as instruments in pari materia, and may be resorted to to ascertain with precision whether the parties intended that the whole contract should be and was embodied in the certificate of stock. Bailey v. Hannibal, etc., R.R. Co., 17 Wallace, 96.

Having thus stated some of the general rules applicable to the matter before us, we will now proceed to examine the facts. The Baltimore Ohio Railroad Company was incorporated by the Act of 1826, ch. 123 of the General Assembly of Maryland. By the second section of the Act its capital stock was fixed at $3,000,000 in shares of $100 each, and by the 13th section, it was provided that if that proved insufficient for the purpose of the Act, it was made lawful for the President and Directors, etc., from time to time to increase the number of its shares, as they might deem necessary. This power was exercised from time to time, so that, when the company went into the hands of receivers in 1896, there were outstanding, of common capital stock to the amount of $25,000,000, par value. The first issue of preferred stock, made under the Act of 1835, ch. 395, was of $3,000,000, par value, to the State of Maryland. By the terms of the ninth section of that Act, the State as the holder thereof was entitled to receive "a perpetual dividend of six per centum per annum, out of the profits of the work as declared from time to time, and no more, etc." The second preferred stock amounting to $2,000,000, was issued under the Act of 1868, ch. 471. This Act was amended by Act of 1880, ch. 474, and now remains in the Code as sec. 294 of Article 23.

The holders of this stock are entitled to "a perpetual dividend of six per centum and no more." So that in 1896 the capital stock of the company was:

Of common stock .............................. $25,000,000
Of preferred stock under the Act of 1835 ..... $ 3,000,000
Of preferred stock under Act of 1868 .........   2,000,000
___________
Total ................................  $30,000,000
___________

In 1896 the company became insolvent, and in February of that year was placed in the hands of receivers appointed by a decree of the Circuit Court of the United States for the District of Maryland.

The aggregate amount of the company's obligations, secured by mortgages and otherwise, or non-secured, were very large, and amounting to many millions, and during the three years of the receivership the amount of obligations was increased by the issuance of receivers' certificates which became liens on the road and its earnings to the extent of over five and half millions of dollars. In June, 1898, a plan for the reorganization of the system was devised by a committee created for that purpose.

It is impossible to examine this plan (a copy of which is to be found in the record) without being impressed with the business skill of its framers. It was manifestly intended and seems to be, a comprehensive document, which should cover every possible contingency that a careful examination and much intelligent thought could suggest. There is apparent a most thorough and exact knowledge of the affairs of the company and a full appreciation of the magnitude of the interests with which they proposed to deal. It is most carefully and skillfully devised and was formulated into words and phrases evidently by some one who was expert and intelligent in the performance of such work. Its aim, as is set forth in its provisions, was to prepare a plan for reorganization which should not only bring the fixed charges within the earning capacity of the road, and secure the payment of the floating debts and existing obligations, but also to provide "adequate capital," for the "present and future requirements of the road." When it is borne in mind that the problem before them involved the adjustment upon just and equitable principles of the various, and doubtless conflicting interests of many persons, the complicated and multifarious relations of the properties of other companies and the combination of all these varied interests in one harmonious plan, it is difficult to conceive how in one of its most important features there should have been left anything to construction. The plan provided for contemplates the issue of three kinds of securities with which the old indebtedness was to be settled for; viz:

1st. $70,000,000, prior lien 3 1/2 per cent gold bonds, due 1925.

2nd. $63,000,000, fifty year four per cent gold bonds.

3rd. $40,000,000, four per cent non-cumulative preferred stock.

4th. $35,000,000, common stock.

Each of these several securities and the purposes of their creation, and how they are to be applied, etc., are carefully described in the plan. It is also provided that no additional mortgage shall be put upon the property and no increase in the amount of the preferred stock, except with the consent of both classes of stock, voting separately. Is it within the bounds of reason to suppose that if it was intended that this large amount of preferred stock was to have the right, to the great injury of the common stock, to share in the surplus of net profits remaining after it has received its four per cent dividend, that these careful business men would not have had it definitely so expressed in the plan? There was nothing in the condition of the law that could have warranted the omission. Whatever Courts may hold eventually as to the right of ordinary preferred stock to share in the residue of net earnings after its preferred dividend has been received, the maintenance of that right in the absence of anything in the contract creating such preferred stock, so far as we are informed, has not yet been taken by any court. No decision holding this has been furnished us by the very able and industrious counsel who argued this case for the appellant, and we have found none ourselves. It is true that some of the text writers do intimate that such may be the law, but the cases cited are those where there is express provision for the participation in the surplus, and fall far short of sustaining the proposition by which the appellants here seek to impose the additional quality upon the preferred stock. One of these cases is Bailey v. Hannibal, etc., Railway Co., 17 Wallace, 96. There it was expressly provided that after the preferred dividend the stock should be entitled to "an equal dividend with said other shares," etc. A like provision is to be found in the other case cited. Allen v. Londonderry, etc., R.R. Co., 25 Wis. 524.

So that there is no room here for the argument that in declaring the rights of the preferred stock it was not necessary to state particularly that it should have such attributes, because of the reason that under well settled principles of law it is entitledproprio vigore to such participation. And although it were conceded that the right of the preferred stockholder, after he has received his preferred dividend, to participate in the surplus net earnings can be supported by cogent reasoning, yet in a case like this where so much exactness of detail is observable in the plan, where the interests involved are so great, and where the proposition of law has not been definitely settled but lies in the mind of each person as he may reason out the matter for himself, it would be most unreasonable to assume that when the schedule for the issue of $40,000,000 of preferred stock was included in the plan, everything was not then put there that the parties intended should be there. It was necessary, in the highest degree, that each class of new issues should be properly described. The description of the new mortgages and the total amounts they were to cover was carefully complete. As to the common stock, it was not necessary that its characteristics should be stated for they were definitely fixed by law. But it was supremely necessary in reference to the preferred stock, to make such description of it as would clearly inform its holders of just what rights would attach to its ownership. It was necessary to state that it was to be non-cumulative and entitled to a preference dividend not exceeding four per cent, otherwise it would have stood on the same footing as the common stock. The holders of practically all the shares of capital stock deposited their securities and accepted the new stock, whereby they "assented to" the issue of the preferred stock and are not now in position to object to the validity thereof. It is clear that the new stock was issued, not under any statute specially authorizing such issue, but solely under the general power of the corporation to issue such stock as all of its stockholders shall direct to be issued, that is by the express agreement of all of its stockholders. To construe this express contract, as set out in the certificate, when read in connection with the resolutions of the directors of April 11th, 1899, and the other papers referred to directly and indirectly in the resolutions, as being incomplete and fragmentary, so that its true meaning cannot be ascertained without reading into it provisions that are, at least, doubtful in law and certainly not sustained by any proof in the case, would do violence to the principles applicable to the construction of written instruments, as have already been herein set forth.

Is there anything in the language employed in the certificate which should require a different construction than that we have given to it. The contract as set forth in the certificate of the preferred stockholder, is: "The holders of preferred stock to the amount now issued and such additional amounts as may be lawfully issued from time to time by the President and Directors of the Company, pursuant to the resolutions of the stockholders duly adopted April 11th, 1899, are entitled to receive in each year, out of the surplus net profits of the company for the current year such yearly dividend (non-cumulative), as the Board of Directors of said Railroad Company may declare, up to, but not exceeding, four per centum, before any dividends shall be set apart or paid upon the common stock."

The certificate of the original preferred stock, issued under the Acts of 1835 and 1868, provided that the preferred stockholder should have a "perpetual dividend of six per centumper annum and no more," and it is insisted that the omission of the words "no more" is significant, as indicating the intention of the parties. But the case of the original preferred stock is different from the one with which we are now dealing. The pre-existing preferred stock was issued to conform to the requirements of the statutes of 1868 and 1835. Both of the statutes contained the words "no more," and it was perhaps proper that they should be there, so that the intention of the Legislature should be clearly expressed. Here the preferred stock was issued with the assent of all the stockholders and to carry out the plan of reorganization. It was the intention of all the parties that the new preferred stock should be issued to carry out the plan of reorganization and that it should have such preferences, rights and attributes as were contemplated by the plan. There was no necessity, therefore, for the use of the words "no more," because by the plan and the resolutions of the company, passed April 10th, 1899, the preferred stock was to be "entitled to receive non-cumulative dividends at the rate of four per centum per annum before the payment of any dividend on the common stock, but shall have no lien upon the property of the company." The omission of the words "no more," therefore, we do not think is a matter of any significance whatever. The words of the plan, referring to the preferred stock, are as follows:

"$40,000,000 four per cent non-cumulative preferred stock perannum before the payment of any dividend on the common stock." If these be compared with the words contained in the certificate of the stock there will be found a slight difference. In the latter certificate it is provided that the preferred stock is entitled to receive out of the surplus such yearly dividend (non-cumulative) as the board may declare "up to, but not exceeding four per centum before any dividends shall be set apart or paid upon the common stock." Why were the words "not exceeding" thus inserted? What is their significance? If it was only to indicate that the four per cent was the largest amount that could be received before the common stock was entitled to a share of the earnings, the words `up to,' would have been quite sufficient and the other words would have been surplusage. But we cannot neglect these words, for in construing a contract it is not to be presumed that words are lightly used, but each word should be given due weight. "A word not plainly inserted by accident or mistake is never to be thrown out entirely while there is a plain and natural construction which can be given to it not manifestly destructive of the general intent of the sentence." Philadelphia v. River Front R. Co., 133 Pa. St. 134.

If it be conceded that the purpose of the certificate was to express what share of the net earnings the preferred stock was to be entitled to, it is possible to give the words "not exceeding" some force, but not otherwise. The certificate would then mean, that it was to receive four per cent and nothingexceeding that proportion; the said amount to be received before any dividends be allowed to the common stock. Upon the hypothesis of the appellant that the whole purpose of the certificate was to declare what the preferred stock was entitled to, before the common stock would be entitled to receive anything, the words "not exceeding" perform no function whatever. The certificate states what the preferred stock "will be entitled to receive;" and that is, "not exceeding four per cent;" that is the measure of its rights, and if so, how is it possible to hold that having received that amount before the common stock received anything, it shall yet receive afterwards, an additional sum? According to the fair meaning of these words, it seems to be clear that a proper construction of them and the only one that will harmonize them all, is that the preferred stock should be non-cumulative and should receive four per cent and no more, out of the net earnings; but should be entitled to receive that before any dividends are set apart for the common stockholders.

It follows that the decrees must be affirmed in both cases.

Decree affirmed in No. 27 and No. 28, April Docket 1901, withcosts in both cases to the appellee.

(Decided June 13th, 1901.)