Biltchik v. Green Bay & W. R. Co.

• Decision Date: 08 April 1947
• Citation: 26 N.W.2d 633,250 Wis. 177
• Court: Wisconsin Supreme Court
• Parties: BILTCHIK et al. v. GREEN BAY & W. R. CO. et al.

250 Wis. 177

26 N.W.2d 633

BILTCHIK et al.

v.GREEN BAY & W. R. CO. et al.

Supreme Court of Wisconsin.

April 8, 1947.

Appeal from a judgment of the Circuit Court for Brown County; Arold F. Murphy, Circuit Judge.

Affirmed.

Action by Aaron L. Biltchik and another against Green Bay and Western Railroad Company and its directors to recover on bonds of the defendant railroad. From a judgment dismissing the complaint, entered May 14, 1946, the plaintiffs appeal. The controlling facts are stated in the opinion.

FRITZ, J., dissenting.

Marvin L. Kohner and Schmitz, Wild & Gross, all of Milwaukee, and Geist & Netter and Netter & Netter, all of New York City, for appellants.

North, Bie, Welsh, Trowbridge & Wilmer, of Green Bay (F. N. Trowbridge, of Green Bay, Cadwalader, Wickersham & Taft, Merrill M. Manning and Walter Bruchhausen, all of New York City, of counsel), for respondents.

FOWLER, Justice.

The instant action was tried before the Hon. Henry Graass, circuit judge for Brown county, who was killed in an automobile collision before deciding it. On stipulation the case was submitted for decisionto the Hon. Arold F. Murphy, judge of the Twentieth Circuit, upon a transcript of the evidence introduced before Judge Graass and the briefs of the parties submitted to him. The nature of the action is stated by Judge Murphy in a written decision filed by him as follows:

‘The plaintiffs, Aaron L. Biltchik and Florence W. Brill, are holders of Class B Debentures of the defendant Green Bay and Western Railroad Company and they sue as individual security holders and on behalf of all other holders of the same securities. It is a representative action and no other holders of the same class of securities have intervened in the action. The individuals named as defendants are the directors of the defendant railroad company.

‘The plaintiffs demand judgment directing the defendant directors ‘to fix and declare, and the Railroad Company to pay pro rata to the plaintiffs and all other holders of Class B Debentures the sum of $825,856.50 plus such amount as the court may find to be due and owing for the year 1944,’ the said sum being the alleged ‘annual net income and annual net earnings of the railroad company, in excess of the amounts distributable to the holders of the Class A Debentures and of the common stock, for the years from 1924 to 1944, both inclusive.’' * * *

‘A plan of reorganization of the predecessor company, adopted in the year 1896, and, which brought into existence a new company, the defendant railroad company, followed on the heels of a foreclosure action in the Federal District Court of Wisconsin. The sum of $600,000 new money was raised and the defendant railroad company took over the assets of its predecessor after the foreclosure. The capital structure after reorganization was as follows:

‘Class A income Debentures, $600,000

‘Common stock, $2,500,000

‘Class B Debentures, $7,000,000.

‘No actual cash was paid by anyone for any of the Class B Debentures. * * *

‘This action is brought to recover the balance due on interest to the Class B Debenture holders upon a covenant contained in the Debentures which in material part reads as follows:

“* * * (the holders) shall in lieu of interest thereon participate in the distribution of annual net income to the following extent only, viz.: So much of the annual net earnings in any year as would be applicable to the payment of dividends on stock shall be applied as follows: * * * (five per cent upon the face value of the Class A Debentures and on the par value of the common stock) and any surplus net earnings arising in such year which may then remain shall be paid to and distributed among the holders of Class B Debentures pro rata. None of such payments shall be cumulative. The amounts, if any, payable on this series of debentures out of the net earnings in any year, will be fixed and declared by the Board of Directors on or before the first day of February, in the following year, and when so declared, any amount payable hereon will be paid.” * * *

Of the securities above mentioned the $600,000 Class A Debentures were issued to the persons who advanced the new money, the $2,500,000 stock to the holders of the first mortgage bonds in foreclosure on their surrender, and the $7,000,000 Class B Debentures to the holders of the second mortgage bonds and the common and preferred stock of the old company on their surrender. It is clear from the undisputed evidence that had the foreclosure suit proceeded in the common course of practice to sale of the mortgaged property neither the holders of the second mortgage bonds nor the stockholders of the old company would have received anything. The scheme of reorganization was manifestly planned to assure that the holders of the subordinate securities should receive nothing whatever until the holders of the new Class A Debentures and the new stock were compensated both through current income and on liquidation of the new corporation, and this must be borne in mind in construing the provisions of the Class B Debentures on which the suit is based. Not only the provision for payment of dividends on the Class B Debentures after the five per cent on the Class A Debentures and to stockholdersis paid, but all other provisions of the Class B Debentures must be considered in determining what income the Class B Debenture holders should receive.

The provision relied on by the plaintiffs and the only one considered by them provided that the holders of the Class B Debentures-‘shall in lieu of interest thereon participate in the distribution of annual net income to the following extent only viz: So much of the annual net earnings in any years as would be applicable to the payment of dividends on stock shall be applied as follows, viz: (five per cent upon the face value of the Class Debentures and on the par value of the common stock) and any surplus net earnings...