Harr v. Pioneer Mechanical Corporation

• Decision Date: 29 May 1933
• Docket Number: No. 365.,365.
• Citation: 65 F.2d 332
• Parties: HARR et al. v. PIONEER MECHANICAL CORPORATION.
• Court: U.S. Court of Appeals — Second Circuit

65 F.2d 332 (1933)

HARR et al. v. PIONEER MECHANICAL CORPORATION.

No. 365.

Circuit Court of Appeals, Second Circuit.

May 29, 1933.

Albert M. Lee, of New York City (J. George Levy, of New York City, of counsel), for appellants.

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

Before L. HAND, SWAN, and CHASE, Circuit Judges.

CHASE, Circuit Judge.

The plaintiffs, stockholders in the defendant corporation, brought this suit in behalf of themselves and all other stockholders in like situation who might become parties. The estate of Lew Lysle Harr, which is being administered under the laws of New York by an executor who resides there, owns 1,000 shares of the preferred stock of the Pioneer Mechanical Corporation, and the L. L. Harr Corporation of New York, a New York corporation, owns 2,497 shares of the preferred stock and 5,200 shares of the common stock of the defendant. The defendant is a Delaware corporation which was organized in April, 1929, under the name of Wells-Newton National Corporation. Its principal office and place of business is in New York City. It is a holding corporation. Its corporate name was duly changed to Pioneer Mechanical Corporation. It was authorized to do business in New York in June, 1929. All books and records are kept in New York and all its business is transacted there. It merely maintains in Delaware a nominal office sufficient to comply with the corporation law of that state.

When the stock of the plaintiffs in the defendant corporation was acquired, its authorized capital consisted of 50,000 shares of preferred stock having no par value but carrying cumulative preferred dividends at the rate of $4 per year "and no more, payable out of any and all surplus or net profits of the corporation quarterly, half-yearly or yearly, as and when declared by the board of Directors before any dividends shall be declared and set apart for, or paid upon, the common shares of the corporation," and 250,000 shares of common stock without par value.

At the time the stock of the plaintiffs was acquired, section 26 of the Delaware Corporation Law (Rev. Code Del. 1915, § 1940), as amended in 1927 (35 Del. Laws, c. 85, § 10), provided that a Delaware corporation "* * * may, from time to time, when and as desired, amend its Certificate of Incorporation by addition to its corporate powers and purposes, or diminution thereof, or both; or by substitution of other powers and purposes, in whole or in part, for those prescribed by its Certificate of Incorporation; or by increasing or decreasing its authorized capital stock or reclassifying the same, by changing the number, par value, designations, preferences, or relative, participating, optional, or other special rights of the shares, or the qualifications, limitations or restrictions of such rights, * * * provided, however, that if any such proposed amendment would alter or change the preferences, special rights or powers given to any one or more classes of stock, by the Certificate of Incorporation, * * * so as to affect such class or classes of stock adversely, or would increase or decrease the amount of the authorized stock of such class or classes of stock, or would increase or decrease the par value thereof, then the holders of the stock of each class of stock so affected by the amendment shall be entitled to vote as a class upon such amendment, whether by the terms of the Certificate of Incorporation such class be entitled to vote or not; and the affirmative vote of a majority in interest of each such class of stock so affected by the amendment shall be necessary to the adoption thereof, in addition to the affirmative vote of a majority of every other class of stock entitled to vote thereon. * * *"

The preferred stock held by the plaintiffs was, when they got it, also entitled on liquidation to $60 per share and all accrued dividends before any distribution was made to common share holders.

On January 1, 1931, the defendant had a deficit of $31,855.12. No dividends were declared on its preferred stock from September 15, 1930, to and including March 15, 1932. On the last-mentioned date each preferred share was $7 in arrears in dividends. On December 9, 1931, the directors authorized a reduction in the capital stock, which was ratified by the stockholders on March 24, 1932. This reduction was reflected in an "Analysis of Consolidated Surplus as of December 31, 1931," which was prepared by the defendant, and which on that basis showed a surplus of $345,697.27 as of that date. A special meeting of stockholders was duly called for March 10, 1932, and adjourned to March 24, 1932, when the stockholders adopted a proposal made by the board of directors as voted at a special meeting of the board on December 9, 1931. Pursuant to the proposal as adopted, the defendant filed an amended certificate of incorporation in the office of the Delaware secretary of state authorizing the issuance of 26,000 shares of new prior preference stock, 26,000 shares of new preferred stock, and 108,000 shares of new common stock, all without par value. The plaintiffs opposed ratification of the proposal, and this action was taken in spite of their opposition. The changes in the status of the holders of stock by virtue of the adoption of this proposal were, so far as now material (1) that new prior preference stock was authorized which should be entitled to receive dividends at the rate of $2.50 a share yearly before any dividends were payable on the shares held by the plaintiffs; (2) that, upon liquidation, or upon any distribution of capital, the holders of these new prior preference shares should be entitled to receive $35 per share in addition to all accrued and unpaid dividends before the shares held by the plaintiffs would be entitled to anything; (3) that old preferred stock holders might convert that stock into prior preference stock upon payment of $2.50 per share or at their option might accept new preferred stock on an even exchange of share for share; (4) that the rights of old and new preferred stock holders to receive accrued dividends on the old preferred stock before common or other stock holders received either ordinary or liquidating dividends were abrogated.

The defendant, it was alleged, was about to offer the prior preference stock for sale to the public in disregard of the rights of the plaintiffs whose stock would be thereby diminished in value; the defendant corporation subjected to the expense of litigation instituted by purchasers who would buy stock upon representations false in that the stock was not entitled to the rights and preferences over the old preferred stock as the defendant represented; and the assets of the corporation would thereby be wasted. A declaratory judgment was sought fixing the rights of the respective stockholders as well as an injunction restraining the defendant and all persons acting in its behalf from "(1) selling, offering or advertising for sale prior preference stock, with the representation that said stock is entitled to priority with respect to dividends or assets of defendant, over the unpaid cumulative dividends on the old preferred stock which have accrued between September 15, 1930 and March 15, 1932, inclusive; (2) issuing or delivering any certificates of prior preference stock of defendant sold with the aforementioned representations."

After the cause was removed, a motion was made by the plaintiffs to remand to the state court on the ground that the District Court was without jurisdiction to entertain an action for a declaratory judgment. The judge who heard the motion denied it on the ground that the suit...