Taft, Trustee v. Hartford, Providence and Fishkill R.R.

The defendant corporation was authorized, by an amendment of its charter, to issue five thousand shares of additional stock, and to provide that the same be "a preferred and guaranteed stock, entitling the holder to preferred and guaranteed dividends equal to ten per cent. per annum, payable semi-annually." Pursuant to this authority this stock was issued, and the certificates entitle "preferred and guaranteed ten per cent. stock," contained the expression, "the same being entitled to preferred and guaranteed dividends at the rate of ten per cent. per annum, payable semi-annually, before any dividend shall be paid on any other stock in said company." This suit is brought to compel the company to pay the plaintiff, holding a portion of said stock, a sum of money equal to ten per cent. per annum on his stock, though no dividends have been earned.

The question presented is, what is the meaning and engagement of the company, as expressed in these words? The relations between these parties are obviously those between shareholders and the corporation. They are not, on the face of the contract, those of creditor and debtor. A corporation may issue bonds or other obligations convertible at certain times and upon certain contingencies into stock. They may issue stock, as in this case, redeemable at a certain time and upon certain conditions. But until such change is made in either case, the original relation remains. A holder of the stock retains his right to share in the management of the corporation and to participate in its profits. He is not its creditor by virtue of this relation. If he is to be constituted its creditor, there are well-known modes and words by which that relation can be expressed. If, instead of adopting them, he receives a certificate of stock, and then claims to be both its creditor and stockholder by virtue of the same contract, the burden is upon him to show that such anomalous relation exists. The presumptions of law and the usual course of business are against him. In this case, the evidence of the relation is a certificate of stock, and the subject of the engagement or contract is the dividends, so called, to be paid upon it. A dividend is money paid out of profits by a corporation to its shareholders. A preferred dividend is that which is paid to one class of shareholders in priority to that to be paid to another class.

The word over which the controversy arises in this case is "guaranteed." Guaranteed, in addition to preferred, applied to dividends, means what? It is certainly not used in the strict and proper sense of the word, for there is, in this contract, no third party promising to make good an engagement by the corporation to its stockholders. Is it, on the one hand, an instance of that tautology so common in legal proceedings, — a synonym for "preferred," and not increasing its significance? Or does it, on the other hand, when it is added to the word dividend, entirely change its character and meaning, and convert a dividend, which, in its nature, cannot legally exist except when originating in profits, into a liability entirely independent of the pre-existence of such profits? Or has it still a third signification, by which, added to the idea of a simple preference out of dividends, it shall be considered as an engagement that a dividend, equal to the sum of ten per cent. per annum, shall be charged upon all the profits which, from year to year, may accrue, thus binding and pledging the total sum of all the earnings of the company, so long as the engagement lasts, to the payment of a dividend "equal to," as the amended charter says, — "at the rate of," as the company express it, — as much as ten per cent. per annum, if semi-annually paid, would amount to, and this amount to be paid before the other stock receives anything.

Intervening the two arguments in this cause, the Court examined, and desired the counsel to examine, beyond our own libraries, the decisions of the courts upon this subject, to see if this somewhat anomalous expression had received a judicial or practical construction. Among the emergencies so common to these railway companies in our country, and in that from which we derive our language and so much of our law, we thought it not unlikely that similar circumstances had induced similar contracts, and that the language used by this company, doubtless under the advice of counsel, might have been taken from railway legislation, or contracts elsewhere, and with a full knowledge of its legal and practical meaning. In this country we found no decision throwing light on this question. In England, however, there are several. The most apt of these cases is, perhaps,Henry v. The Great Northern Railway Company, 3 Jurist, part i.p. 1,133. An act of Parliament in that case authorized the company "to guarantee the payment of dividends," not exceeding a certain per cent.," and in preference to the payment thereof on other shares." The question in this, as in the other English cases over similar words, was between what we have indicated as the first and third construction. It has never been even claimed in the English courts that the construction secondly stated by us, and urged by the plaintiff, could be adopted, and the court decides that these statutes guarantee to the favored stockholders "a charge on all accruing profits at the stipulated rates, before anything is divided among the ordinary shareholders. This is substantially interest chargeable exclusively on profits." And they further hold that if the profits, accrued when the dividend is declared, are insufficient to furnish the stipulated amount, the deficiency is a chargeupon subsequent profits. Again in Crawford v. North EasternRailway Company, 3 Jurist, N.S. part i.p. 1,093, Vice-Chancellor Wood says, in conclusion: "Of course, I do not mean to say that it is a guaranty in any other sense than that you are to be paid these sums out of the profits of the company. That is the only fund you are to look to. If the company make no profits you will have no dividend, but, I apprehend, the profits in perpetuity." In Matthews v. Great Northern Railway Company, 5 Jurist, N.S. part i.p. 284, the Vice-Chancellor says of the term "guaranteed share:" "It must be a guaranty limited, at least, to the whole profits made by the railway."

Without dwelling longer upon this and similar authorities, it is perfectly apparent that the guaranty of a dividend by a railway company is considered by the courts, and, it seems from the course of the argument by the counsel in these causes, who, doubtless, faithfully represent the interests and wishes of their clients, by the business community also, to mean nothing more than a pledge of the funds legally applicable to the purposes of a dividend; that, in short, it is a dividend, and not a debt, which is thus preferred and guaranteed; and as the statement of facts admits that dividends have not been earned in this case, the plaintiff, if there were no other difficulties in his way, could not recover, and we must give judgment for the defendant.

NOTE. — Mr. Justice Durfee did not sit in the above case, he having been of counsel at the time the arguments in the suit were first filed, as appears by the foregoing report.