Garrett v. Edge Moor Iron Co.

• Decision Date: 22 July 1937
• Citation: 22 Del.Ch. 142,194 A. 15
• Court: Court of Chancery of Delaware
• Parties: HELEN S. GARRETT, as a stockholder of Edge Moor Iron Company, v. EDGE MOOR IRON COMPANY, a dissolved corporation of the State of Delaware. In the Matter of the Petition of Frank G. Cox and John H. Shively, Receivers of Edge Moor Iron Company, for Instructions

194 A. 15

22 Del.Ch. 142

HELEN S. GARRETT, as a stockholder of Edge Moor Iron Company, v. EDGE MOOR IRON COMPANY, a dissolved corporation of the State of Delaware. In the Matter of the Petition of Frank G. Cox and John H. Shively, Receivers of Edge Moor Iron Company, for Instructions

Court of Chancery of Delaware, New Castle

July 22, 1937

PETITION BY RECEIVERS FOR INSTRUCTIONS. The Edge Moor Iron Company was placed in voluntary dissolution and the petitioners were appointed by this court as receivers in dissolution on December 18, 1935.

The amended charter of the company provides for the issuance of preferred stock and common stock, each having a par value of one hundred dollars per share. The two classes were given equal voting rights. At the time of dissolution there were 5,712 shares of the preferred stock outstanding and 8,000 shares of the common.

The following provisions of the charter, as amended, are of particular relevancy in the pending controversy. They are here broken into lettered paragraphs for convenience of reference.

A. The preferred stock shall primarily receive dividends, when and as declared out of the surplus or net earnings of the corporation, at the rate of six per centum per annum, payable semi-annually on the first day of April and October in each year; the dividends on the preferred stock shall be paid or set apart before any dividend shall be paid on the common stock.

B. In the event of any liquidation or dissolution or winding up of the company, whether voluntarily or involuntarily, the holders of the preferred stock shall be paid in full the par value of their shares with all unpaid dividends thereon to the date of such payment before any amount shall be paid to the holders of the common stock.

C. The preferred stock shall be subject to redemption, in whole or in part, at one hundred and two dollars and fifty cents per share on the first day of April, nineteen hundred and twenty or on the first day of April or October at any time thereafter.

D. The common stock shall be entitled to receive all other dividends that may be declared by the board of directors from surplus or net earnings, but no such dividends shall be payable until after the dividends shall be paid on the preferred stock.

The company paid regular semi-annual dividends on its preferred stock until April 1, 1932. On that date it passed the preferred dividend and never paid one thereafter. The common stock has never received a dividend.

The receivers have liquidated the major portion of the assets. During the course of administration, in pursuance of authority duly obtained, the receivers paid to each share of preferred stock outstanding the par value of one hundred dollars. They have remaining in hand about one hundred and fifty-five thousand dollars in cash and unliquidated assets of an appraised value of about sixty-five thousand dollars.

The preferred stockholders contend that the remaining assets should be applied first to the payment of dividends that were not paid to them during the years following October 1, 1931 down to the date of the payment to them in dissolution before anything is paid to the common stockholders.

The common stockholders contend that the assets on hand at and since dissolution contained no surplus or net earnings and that therefore the preferred stockholders are entitled to receive nothing beyond the amount of the par value of their shares, and, since that amount has been already paid by the receivers, all the remaining cash in hand and the proceeds from the remaining unliquidated assets should be paid to the common stockholders.

Such are the respective contentions in answer to which the ensuing opinion was filed.

James H. Hughes, Jr., of the firm of Ward & Gray, for the receivers.

Robert H. Richards and Robert H. Richards, Jr., of the firm of Richards, Layton & Finger, for preferred stockholders.

Reuben Satterthwaite, Jr., of the firm of Satterthwaite & Foulk William S. Satterthwaite, Hugh M. Morris, and Ivan Culbertson, for sundry common stockholders.

OPINION

THE CHANCELLOR:

The provision for payment to the preferred stockholders in event of liquidation, found in paragraph B of the charter, is that they shall receive the par value of their shares "with all unpaid dividends thereon." It is this phrase that gives rise to the controversy.

The preferred stockholders contend that the omission of the company to pay dividends to them since October 1, 1931, must now be repaired out of the assets regardless of whether or not those assets contain surplus above capital, and regardless of whether or not the dividends provided by the charter were cumulative or non-cumulative.

In the view I take of the case, the question of the character to be attributed to the assets, whether they are solely of a capital nature or whether, in view of past book surpluses, they may be treated in equity as representative of surplus, is a question that need not be examined. I shall assume them to be of the character most unfavorable to the preferred stockholders' interests, namely, that the assets are strictly capital assets and have in no wise been built up by net earnings so as to permit of the presence among them of surplus.

As to the contention of the holders of preferred stock that their right to receive "all unpaid dividends thereon," is unaffected by the circumstance of whether the dividends were cumulative or non-cumulative, it is not necessary for me to express an opinion thereon. This is for the reason that the preferred dividends provided for in paragraph B of the charter appear to me to be cumulative. Whether, therefore, if the dividends were non-cumulative, the result of the case would be the same, may be passed by as not necessary to be considered.

Are the dividends cumulative? It is to be noted in the first place that the dividend is at a fixed rate. If it were at an indefinite rate, as it would be if the expression were such as "at a rate of not exceeding six per centum per annum," the dividends would not be cumulative. Elkins v. Camden, etc., R. R. Co., 36 N.J.Eq. 233. The rate here is definite. Furthermore, the surplus or net earnings out of which the dividends are to be paid are not the surplus or net earnings as ascertained in each dividend year. Where such is the case there is room to take the view which was adopted in Staples v. Eastman's Photographic, etc., Co., [1896] 2 Ch. 303, and in Belfast & M. L. R. R. Co. v. Belfast, 77 Me. 445, 1 A. 362, viz., that each dividend year stands by itself, and that the right to be paid the stipulated rate for any one year either arises or does not arise according as a fund for the payment exists or not in that particular year, and no later year's earnings or surplus can be resorted to for a prior year's obligation. This logic doubtless supplies the reason for the rather standard form in cumulative stock clauses usually found in corporate charters which, when preferred dividends are declared to be payable out of each year's net earnings, provides further by express language that if in any year the dividend is not paid, it shall be paid out of the earnings of later years.

In the instant case, as the annual dividend is not restricted for payment to the earnings of each year, there was no occasion to add the usual clause just referred to in order to subject the earnings of later years to the payment of dividends that were passed in previous years.

Here the net earnings and surplus out of which the stipulated dividends were to be paid, were not the net earnings of each year to which each particular annual dividend was allocable. The dividends were chargeable against net earnings and surplus generally, which means for all time. Where such is the charter contract, the authorities are in unison in holding that the stipulated dividend is cumulative and is always payable ahead of dividends on subordinate stock whenever a lawful fund is available for distribution to stockholders. This proposition is stated by VanFleet, V. C., in Elkins v. Camden, etc., R. R. Co., supra, as firmly established. The authorities both American and English support it, as do also the text writers. West Chester & Philadelphia R. R. Co. v. Jackson, 77 Pa. 321; Fidelity Trust Co. v. Lehigh Valley R. R. Co., 215 Pa. 610, 64 A....