Harr v. Pioneer Mechanical Corporation

• Decision Date: 18 November 1932
• Citation: 2 F. Supp. 517
• Parties: HARR et al. v. PIONEER MECHANICAL CORPORATION.
• Court: U.S. District Court — Southern District of New York

2 F. Supp. 517

HARR et al. v. PIONEER MECHANICAL CORPORATION.

District Court, S. D. New York.

November 18, 1932.

Albert M. Lee, of New York City, for plaintiffs.

Cotton, Franklin, Wright & Gordon, of New York City (Paxton Blair, of New York City, of counsel), for defendant.

PATTERSON, District Judge.

The plaintiffs have applied for a preliminary injunction, and the defendant has made a counter motion to dismiss the bill as insufficient on its face. According to the amended bill, the plaintiffs are holders of a substantial block of preferred stock of the defendant which under the certificate of incorporation was entitled to cumulative dividends at the annual rate of $4 per share out of the surplus or net profits of the corporation. The certificate provided further: "Said dividends on the said preferred stock shall be cumulative, so that if the corporation shall fail in any fiscal year to pay such dividends on all of the issued and outstanding preferred stock, such deficiency in the dividends shall be fully paid, but without interest, before any dividends shall be paid or set apart on the common shares." By March 24, 1932, seven quarterly dividends on the preferred had been passed, so that the sum of $7 a share had accrued to the holders of the cumulative preferred stock.

On March 24, 1932, the stockholders held a meeting to consider amendments to the certificate of incorporation, pursuant to the Delaware law. The amendments proposed were adopted, and an amended certificate was accordingly filed in the proper public office in Delaware. By the amendments a new prior preference stock was created. New preferred stock and new common stock, to be given in exchange for the old, were also authorized. In addition to many changes operative for the future, as to which the plaintiffs make no complaint, one effect of the amendments was to abolish the right of the preferred stockholders to receive the dividends accrued and unpaid on their stock. The plaintiffs did not consent to the amendments. The defendant is offering the new prior preference stock on the representation that it is entitled to dividends before any back dividends on the old preferred stock are paid. The bill further shows that, although the defendant is a Delaware corporation, the office where all of its business is done is in New York City. In fact, it has no other place of business.

The relief demanded is a declaratory judgment to the effect that the holders of the old preferred stock are entitled to the unpaid cumulative dividends before any dividends may be paid on the new prior preference or on the common stock and before any payment on winding up or redemption can be made to other stockholders. The plaintiffs also demand that the defendant be enjoined from further sale of the prior preference stock on the representation that such stock is entitled to priority as to dividends and assets over the unpaid cumulative dividends on the old preferred stock, a representation said to be untrue and likely to involve the corporation in costly litigation and in loss.

The suit was brought in the New York Supreme Court and was removed to this court by the defendant for diversity of citizenship. A motion was made to remand the case on the ground that this court had no jurisdiction to entertain a suit for declaratory judgment. Judge Woolsey denied the motion (D. C. 1 F. Supp. 294), pointing out that the plaintiffs seek more than a mere declaration of their rights, and that the suit in its injunctive feature is not beyond the jurisdiction of the court as a court of equity. The situation then is that the court may not pass upon the rights of the plaintiffs against the common stockholders, for to do so would be equivalent to the issuance of a declaratory judgment, but it may pass upon the rights of the plaintiffs against the holders of the new prior preference stock, since the propriety of an injunction turns upon a determination of these rights. In other words, the question whether the stockholders can wipe out altogether the back dividends on the old cumulative preferred stock by adopting an amendment to the charter is not properly before the court; but the question whether they may subordinate such back dividends to dividends on new prior preference stock is properly raised and is before the court for decision.

As a preliminary point against maintenance of the suit, the...