Sumrall, &C., v. Commercial Building Trust's Assignee, &C.
| Decision Date | 18 March 1899 |
| Parties | Sumrall, Etc. v. Commercial Building Trust's Assignee, Etc. |
| Court | Kentucky Court of Appeals |
APPEAL FROM JEFFERSON CIRCUIT COURT, COMMON PLEAS DIVISION.
CARUTH, CHATTERSON & BLITZ FOR THE APPELLANT. (SUMRALL & SUMRALL OF COUNSEL.)
SAME COUNSEL IN A SUPPLEMENTAL BRIEF FOR THE APPELLANT, SUMRALL. (WATTS & WATTS OF COUNSEL.)
WILLIAM J. WATTS FOR APPELLANTS WILLIAMSON, &c. (JOSEPH S. BOTTS, W. W. & J. R. WATTS OF COUNSEL.)
J. C. POSTON AND CLARENCE DALLAM FOR THE COMMON STOCKHOLDERS. (M. B. BOWDEN OF COUNSEL.)
COPYRIGHT MATERIAL OMITTED
CHARLES C. FOX FOR THE APPELLEES, JOHN L. SMITH, &C.
WILLIAM FURLONG AND JOHN ROBERTS FOR APPELLEES' COMMON STOCKHOLDERS.
FAIRLEIGH, STRAUS & EAGLES, FOR APPELLEE — THE ASSIGNEE.
CHIEF JUSTICE HAZELRIGG DELIVERED THE OPINION OF THE COURT.
The Commercial Building Trust is a corporation organized in February, 1892, under chapter 56 of the General Statutes. The general nature of its business was to "lend its money to its stockholders, especially with the view of aiding them to procure homes, and, in case of a surplus not needed by the stockholders, to other persons." Articles of Incorporation, p. 8. The object of the corporation was "to afford its members a safe and profitable investment for their earnings, and an opportunity to obtain loans upon easy terms, to purchase homes, and establish themselves in business." By-laws, p. 9.
The capital stock was to consist of $10,000,000 — 100,000 shares, of the par value of $100 each — of preferred stock; and $1,000,000 — 1,000 shares, of the par value of $1,000 each — of common stock. The former, or preferred stock, was to be subscribed for and paid in upon such terms, and at such times, as the by-laws might prescribe; being in installments of small amounts, payable periodically or in larger payments, at the election of the subscriber. The common stock was to be subscribed for and paid in upon such terms, and at such times, as the board of directors might, from time to time, determine, and it might be issued in monthly or other periodical series. We conclude, therefore, that the business of the concern, to all practical intents, was that of an ordinary building and loan associa; tion, so extended and amplified, however, as to embrace objects and purposes wholly foreign to such associations proper, and which have been condemned by this court in numerous cases.
The articles of incorporation provide that "the preferred stock is guaranteed by this corporation to mature, and be payable, in seven years from the date of the payment of the first installment paid on said stock."
And a by-law provides that the funds of the common stock "shall constitute the guaranty for the maturity of the preferred stock."
This preferred stock was to be issued in various classes, in some of which the dividend to be paid was at the rate of 8 per centum per annum, and in others at the rate of 10 per centum per annum, all payable semi-annually.
As soon as organized, the corporation began business, and issued, from time to time, both common and preferred stock. Becoming insolvent, however, it made, in June, 1897, for the benefit of its creditors, an assignment of all its assets to the Columbia Finance & Trust Company. In the administration of the trust, the question was presented to the chancellor, in a suit brought for a settlement of the estate, whether, there not being enough money to pay the alleged preferred stockholders in full, the entire funds of the corporation should be distributed to them, to the exclusion of the common stockholders.
The chancellor answered this question by holding "that none of the stock of the defendant corporation is entitled to a preference over other stock in said corporation, and that all stockholders, indiscriminately, shall share equally in the distribution of the assets of the corporation in the hands of the assignee, in proportion to the amounts paid into the corporation by them, respectively, on their stock, after the payment of its debts, and the proper costs, expenses, and charges of the assignee in the execution of the trust."
The correctness of this judgment is the sole question presented on this appeal. Without reference, for the present to certain interesting questions ably discussed by counsel, involving the validity of the issual of preferred stock by this corporation, we turn at once to a consideration of the terms of the contract by which the corporation guaranteed that its preferred stock should "mature and be payable in seven years from the date of the payment of the first installment paid on said stock."
This is the only provision on the subject of guaranty to be found in the articles of incorporation, and it seems to apply only to installment stock. So construing it, the provision means simply that, upon the subscriber for this stock making his monthly payments of 60 cents per share for the period of seven years, or $50.40 in the aggregate, the corporation guaranteed that the dividends thereon would so accumulate as that the stock would be worth $1 per share. Putting the guaranty in another form, the corporation guaranteed that it would declare, at the end of seven years, a dividend of $49.60 on each share of preferred installment stock, but this stock is to be paid for in monthly installments of 60 cents per month.
In the by-laws, however, there is a further provision, by which the corporation "guaranteed the maturity of class D installment stock in seven years from the date of the first month's dues paid thereon, and class E installment stock in ten years from the date of the first month's dues paid thereon, and class F paid-up stock in seven years from the date of its issuance. Here, again, is merely a guarantee that dividends sufficient to mature certain classes of installment stock and a class of paid-up stock would be declared at the end of seven years. The subscribers to this stock were members of the association, and participants in the scheme of so loaning out its funds as that the usurious rates were to be realized. It was by reason of the unlawful and usurious character of this scheme, which was adopted by the association with the approval and by the votes of these members or their representatives, that the enterprise failed of execution; and, when it failed, the so-called "guarantee" was at an end.
Moreover, the guarantee on the part of the company that it would declare, in a given time, certain dividends, or dividends sufficient to mature certain stock, or an agreement that it would set apart certain other stock as a guarantee of such dividends, can not be enforced unless there are net profits — dividends proper — out of which the guarantee can be made good and the dividends paid. The reason is because the contract does not, and can not, in the nature of things, create the relation of debtor and creditor. The member is a shareholder in the association — a preferred one, it is true — when there are profits out of which he may be paid; otherwise, not. Mr. Cook, in his work on...
To continue reading
Request your trial