Brown v. McLanahan

• Decision Date: 09 April 1945
• Docket Number: No. 5342.,5342.
• Citation: 148 F.2d 703
• Parties: BROWN v. McLANAHAN et al.
• Court: U.S. Court of Appeals — Fourth Circuit

148 F.2d 703 (1945)

BROWN v. McLANAHAN et al.

No. 5342.

Circuit Court of Appeals, Fourth Circuit.

April 9, 1945.

Elias Field and Horace P. Moulton, both of Boston, Mass., and J. Cookman Boyd, Jr., of Baltimore, Md. (Donald T. Field, of Boston, Mass., on the brief), for appellant.

Harry N. Baetjer and John Henry Lewin, both of Baltimore, Md., for appellees.

Before PARKER, SOPER, and DOBIE, Circuit Judges.

DOBIE, Circuit Judge.

This appeal from an order granting a motion to dismiss, involves the equitable rights attaching to certain voting trust certificates representing shares of preferred stock of the Baltimore Transit Company (hereinafter called the Company).

The appellant, Dorothy K. Brown (hereinafter referred to as plaintiff), as the holder of voting trust certificates representing 500 shares of the preferred stock of the Company, brought a class action against the voting trustees, the directors of the Company, the Company itself, the indenture trustee for the holders of the Company's debentures, and the debenture holders as a class (herein collectively referred to as defendants), seeking to set aside as unlawful an amendment of the Company's charter which purports to vest voting rights in the debenture holders. On oral argument before this Court, it was stated that the holders of 45,000 shares of preferred stock have indicated their approval of this suit.

The securities involved in this litigation were issued under a plan of reorganization of the United Railways and Electric Company of Baltimore, and The Maryland Electric Railways Company and Subsidiary Companies, under Section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207. The plan was approved by the United States District Court for the District of Maryland. In re United Railways & Electric Co. of Baltimore's Reorganization, 11 F. Supp. 717.

That part of the reorganization plan relevant to the question before us may be briefly summarized.

The plan provided for the issuance of three types of securities. Debentures in the amount of $22,083,381 and 233,427 shares of preferred stock were issued to the holders of all first lien bonds on the basis of $500 principal amount of debentures, and five shares of preferred stock, par value $100 per share for each $1,000 principal amount of the bonds; 169,112 shares of new common stock, without par value, were issued to the old common stockholders and to unsecured creditors.

Under the plan of reorganization, voting rights were vested exclusively in the preferred and common stock. Each share of preferred entitled the holder to one vote on all corporate matters (except that the power to elect one director was exclusively vested in the common stock) and further, so long as any six months' instalment of dividends on the preferred remained in arrears, the holders of the preferred stock held the exclusive right to vote for the election of all but one director. Three shares of common stock entitled the holder to one vote.

The plant also provided for the establishment of a voting trust of all the preferred and common stock of the reorganized company for a period of ten years, the maximum period permitted by Maryland law. In accordance with this provision, all the stock was issued to eight voting trustees under a voting trust agreement which was to terminate on July 1, 1945. The trustees in turn issued voting trust certificates to those entitled to distribution under the plan. Under the plan, the voting rights were to revert, on termination of the trust, to the certificate holders in proportion to the number of shares represented.

No dividends have ever been paid on the preferred stock, and pursuant to the charter provision, at all times since dividends have been in arrears, the exclusive right to elect all but one director has been vested in the preferred stock.

The eight voting trustees are also a majority of the directors of the Company, elected as such by their own vote as trustees. On June 21, 1944, without notice of any kind to the certificate holders, the directors passed a resolution recommending, and the voting trustees as stockholders voted to adopt, an amendment to the Company's charter.

Article VII of the Voting Trust Agreement, by authority of which the trustees purportedly acted, provides in part as follows:

"(1) Until the termination of the trusts of this instrument the entire right to vote upon or with respect to all shares of Preferred and/or Common Stock deposited, or at any time held hereunder, and the right to otherwise authorize, approve or oppose on behalf of said shares of stock any corporate action of The Baltimore Transit Company shall be vested exclusively in said Trustees; without limiting the generality or scope of the foregoing provisions such rights shall include the right to vote or act with respect to any amendment of the certificate of incorporation of the Company, the increase, reduction, classification, reclassification of its capital stock, change in the par value, preference and restrictions and qualifications of all shares, the creation of any debts or liens, any amendment to the By-Laws, the election or removal of directors, the acceptance of stock in payment of dividends as well as every other right of an absolute owner of said shares, * * *"

Briefly, the amendment effected several changes in voting rights. It eliminated the arrearage clause which had provided for exclusive voting rights in the preferred stock. It also granted voting rights to the holders of debentures, one vote for each $100 principal amount of the debentures, thus creating approximately 221,000 new votes eligible to be cast in all corporate matters. And, further, as of the date of termination of the voting trust agreement on July 1, 1945, the common stockholders would be deprived of their exclusive right to elect one director.

These facts are all substantially set forth in plaintiff's complaint. The complaint alleges, and for purposes of the motion to dismiss these allegations must be accepted as true, that the creation of 221,000 new votes in the debentures will dilute the voting power of the stock; that the amendment will deprive the voting trust certificate holders of their right to control the management of the Company, and the election of its directors after the expiration of the voting trust; that these voting trustees are holders of substantial amounts of debentures, either in their own right, or as officers of various banks.

Plaintiff contends that the action of the voting trustees in adopting the amendment was a breach of the fiduciary duty owed to the certificate holders and seeks fourfold relief that: (1) The amendment of June 21, 1944, be declared null and void; (2) the voting trustees be removed; (3) the voting trust be terminated; and (4) damages be allowed in the alternative.

The crux of the complaint is that the voting trustees, faced with the fact that the voting trust would shortly expire and that they would no longer be able to control the corporation, proceeded to amend its charter so that they would be able to hold on to the control by giving voting rights to the debentures (thereby enhancing the value of these debentures) which were largely owned or controlled by them or by corporations in which they were interested and to take away from the preferred stock the power of control which resided in it when dividends were in arrears.

Section XI of the complaint reads:

"Upon the information and belief the plaintiff says that the purpose and intended result of said purported amendment is to effect in the Voting Trustees in their individual capacities the continued control of the business and affairs of the Company after the expiration of the Voting Trust Agreement on July 1, 1945 and that said action by said Voting Trustees was motivated by the knowledge that many of the Voting Trust Certificate holders for the preferred stock were and are dissatisfied with the management of the Company by said Voting Trustees in their capacities as such and as directors of the Company, whereas, by said purported amendment valuable voting rights would be extended to the debenture holders, very many of whom will, it is believed, vote to retain the Voting Trustees in control of the Company after the termination of the Voting Trust Agreement. Upon information and belief the plaintiff also says that a majority of the Voting Trustees are either the holders of substantial amounts of debentures or are officers or directors in various banks or trust companies which own or control large amounts of said debentures, and that the vesting of voting rights in such debentures would materially increase and enhance the value of said debentures, and will diminish the value of the Voting Trust Certificates and the preferred stock."

Plaintiff contends that such action on the part of the trustees was invalid for three reasons: (1) Because it was beyond the powers vested in the trustees to diminish the voting power, which they held in trust for the holders of preferred stock as well as for other stockholders and debenture holders, so that upon the termination of the trust they would not be able to return it to those from whom they had received it in the same condition in which it was received; (2) because it was an abuse of trust to use the voting power which the trustees held in trust for the benefit of preferred stockholders as well as of the debenture holders to the advantage of the latter and the detriment of the former; and (3) that it was an abuse of trust to use the voting power for their own benefit and the benefit of corporations in which they were interested and to the detriment of preferred stockholders who were beneficiaries of the trust. We think the action of the trustees was invalid for all three reasons. As to the third reason, it could well be that the evidence at the trial may show the facts to be different from the facts as alleged. There seems to be no dispute as to the facts to which the first...