Burk v. The Ottawa Gas and Electric Company

• Decision Date: 11 May 1912
• Docket Number: 17,310
• Citation: 87 Kan. 6,123 P. 857
• Parties: C. F. BURK et al., Appellants, v. THE OTTAWA GAS AND ELECTRIC COMPANY et al., Appellees
• Court: Kansas Supreme Court

123 P. 857

87 Kan. 6

C. F. BURK et al., Appellants, v. THE OTTAWA GAS AND ELECTRIC COMPANY et al., Appellees

No. 17,310

Supreme Court of Kansas

May 11, 1912

Decided January, 1912.

Appeal from Franklin district court.

Judgment reversed and cause remanded.

SYLLABUS

SYLLABUS BY THE COURT.

1. CORPORATION -- Preferred Stock -- Contract -- Dividends. The capital stock of a corporation was issued and subscribed in the ratio of three-tenths preferred stock to seven-tenths common stock, and the by-laws, adopted at the organization, provide: "The preferred stock shall carry a six per cent per annum preferred, noncumulative dividend payable semiannually on the first days of July and January of each year after January 1st, 1906, out of the net profits of the preceding fiscal year, and a pro tanto dividend if such dividend fall short of 6 per cent; and the preferred stock may be called in as a whole or in pro rata installments at 101 and accrued dividend and cancelled at the option of the board of directors on three months notice at any dividend paying period after two years dividend has been paid thereon." Held, (1) that such by-law constitutes a contract between the preferred stockholders and the corporation which a court of equity will enforce when the specified conditions exist which entitle the preferred stockholders to a dividend and it is refused them; (2) the cost of operating the plant in furnishing gas within the city, including necessary repairs, extensions, fixed charges, taxes and other necessary expenses, only, shall be charged as expenses to be deducted from the entire receipts from the business to determine the net profits.

2. CORPORATION -- Same. If net profits, as above defined, had accrued in the business from year to year it was not within the discretion of the board of directors to declare or not to declare a dividend on such preferred stock. If the funds were available for the purpose, the preferred stockholders were entitled to a dividend as a matter of right.

3. CORPORATION -- Same. The duty to declare a dividend upon such preferred stock is, however, subordinate to the obligation of the corporation to the public. And if it was necessary to use all of the earnings in the enlargement of the plant in order to fulfill such obligation the declaration of a dividend was not required.

4. CORPORATION -- Gas Franchise -- Extension of Service. Although the contract of the corporation with the city requires it to extend its service upon the application of five patrons, a duty to make an extension may arise without the making of such application.

W. S. Jenks, and F. M. Harris, for the appellants.

Ralph E. Page, and Harkless, Crysler & Histed, for the appellees.

SMITH, J. WEST, J., concurs in this dissent.

OPINION

SMITH, J.:

This action was brought by the preferred stockholders of the Ottawa Gas and Electric Company against two other corporations, alleged to have some interest in the matter in controversy, and W. T. Harris, George A. Rodgers, C. H. Pattison, S. J. Mattox, V. Hundley and I. W. King, alleged to be the officers and directors of the Ottawa Gas and Electric Company.

The action was brought to require all of the defendants to account for all the property and assets of every description which were at the time of bringing the action or had been at any time in the possession of the defendants or any of them, and that upon the final hearing of the action the court should order the directors of the Ottawa Gas and Electric Company to declare such dividends from the net profits of the business of such company as should have been declared since January 1, 1906, and further, to restrain the officers and directors of the Ottawa Gas and Electric Company during the pendency of the action from paying out any of the money or disposing of the assets of the company except such amounts as should be necessary to pay the actual necessary current expenses of conducting the business of the company, and other relief is prayed for.

Upon the filing of the petition a temporary injunction was allowed, but thereafter was discharged upon the defendants giving a bond, which was approved by the court, to satisfy any judgment which might be rendered in the action. The action is, of course, equitable.

A motion for a new trial was overruled and judgment rendered against the plaintiffs for costs, and they appeal.

The following copy of a certificate of stock is attached to the petition as a facsimile, except as to the name and number of shares, of the shares of stock issued to each preferred stockholder.

"NUMBER

36

SHARES.

"THE OTTAWA GAS AND ELECTRIC CO.

Ottawa, Kansas.

Capital Stock, $ 250,000.

"THIS CERTIFIES that C. F. Burk is the owner of eight shares, fully paid, of the preferred stock of The Ottawa Gas and Electric Company, transferable only on the books of the company in person or by an attorney on surrender of this certificate properly endorsed.

"The capital stock of this company is subject to the following conditions and provisions of the by-laws:

"'Article 4. Section 1. 'The $ 250,000 capital stock of this company shall be divided into two classes, of which $ 75,000 shall be preferred and $ 175,000 shall be common stock, both of which shall have equal voting power but to which the following different conditions shall otherwise respectively attach; viz: The preferred stock shall carry a six per cent per annum preferred, noncumulative dividend, payable semiannually on the first days of July and January of each year after January 1st, 1906, out of the net profits of the preceding fiscal year, and a pro tanto dividend if such dividend fall short of 6 per cent; and the preferred stock may be called in as a whole or in pro rata installments at 101 and accrued dividend and cancelled at the option of the board of directors on three months notice at any dividend paying period after two years dividend has been paid thereon. Upon the common stock only such dividend and at such times shall be paid out of the company's net profits as the board of directors may in their judgment deem it advisable to declare.'

"IN WITNESS WHEREOF, The company has caused this certificate to be signed by its duly authorized officers and its corporate seal to be hereunto affixed this 12th day of October, A. D. 1906.

"CHAS. T. LUTHY,

C. H. PATTISON,

"Secretary,

President.

"Shares $ 100 each."

The following findings of fact are all that are considered necessary to present the issues:

"II.

"In September, 1905, the mayor and councilmen of the city of Ottawa, by ordinance duly enacted, granted to C. H. Pattison and his assigns a franchise to construct and maintain a natural gas plant in the city of Ottawa for the term of twenty-five years. The franchise among other provisions had the following:

"'Section 13. The said C. H. Pattison, his successors and assigns shall extend the pipes and mains for conducting said natural gas and electric light wires, and service whenever five consumers of an shall request that such extension shall be made.'

"IV.

"On September 23, 1905, said C. H. Pattison, together with W. L. Pattison and the plaintiff Charles T. Luthy, G. A. Rodgers and W. T. Harris, organized a corporation known as The Ottawa Gas and Electric Company, and the defendant in this case, with a capital stock of $ 250,000.00 divided into 2500 shares of $ 100.00 each.

"V.

"Before organizing this corporation the said C. H. Pattison leased from the Ottawa Gas and Heating Co., its artificial gas plant for a term of twenty-five years for $ 1500.00 per year, which amount was just sufficient to pay the interest upon the bonds of that company."

To which the court afterward added:

"Shortly after leasing said Ottawa Gas & Heating Co., the said C H. Pattison became the owner by purchase of said plant."

"VI.

"On or about October 11th, 1905, at the first meeting of the stockholders of the new corporation, all the stockholders being present said C. H. Pattison proposed to the stockholders that he would transfer to the new corporation, which for brevity I will hereafter refer to as The Ottawa Gas Co. all of his right, title and interest in the Ottawa franchise and the gas contract with the Natural Gas Co. and the lease from the Ottawa Gas and Heating Co., and would at his own expense make certain repairs and furnish certain appliances to transform the artificial gas plant into a natural gas distributing plant, which expenditure was afterwards by agreement fixed definitely at $ 40,000.00 for the sum of $ 325,000.00, $ 250,000.00 to be applied in payment of subscriptions to the capital stock of the new corporation, as follows: $ 246,000.00 to C. H. Pattison, $ 1000.00 to W. L. Pattison, $ 1000.00 to Charles T. Luthy, $ 1000.00 to G. A. Rodgers, and $ 1000.00 to W. T. Harris the stock thus issued to be in the proportion of seventy per cent common stock and thirty per cent preferred stock, and for the remaining $ 75,000.00 the company should issue to him $ 75,000.00 of the bonds of the company, secured by first mortgage bearing six per cent, which proposition was by the company accepted, and in due time fully carried out.

"IX.

"About the time of the organization of these different corporations said C. H. Pattison organized what was known as The Union Gas and Traction Co. of New Mexico, which he controlled. The only assets of the corporation was the stocks and bonds of the various Kansas corporations organized by him, and its only business seemed to be to handle these stocks and bonds. About the same time he organized The Union Gas and Traction Company of Missouri, and the only business of this latter corporation was to enter into a contract with The Ottawa Gas Co., and the other corporations furnishing...