Heller v. National Marine Bank

• Decision Date: 22 June 1899
• Citation: 43 A. 800,89 Md. 602
• Parties: HELLER et al. v. NATIONAL MARINE BANK et al.
• Court: Maryland Court of Appeals

43 A. 800

89 Md. 602

HELLER et al. v. NATIONAL MARINE BANK et al.

Court of Appeals of Maryland

June 22, 1899

Appeal from circuit court of Baltimore city; Pere L. Wickes, Judge.

Bill by F. Dorsey Grafflin for a dissolution of the Chesapeake Guano Company and the appointment of receivers. An auditor's account was stated, and the net assets distributed among the holders of the preferred stock to the exclusion of the general creditors. Heller, Hirsch & Co. and others of the general creditors appeal. Modified.

Argued before MCSHERRY, C.J., and PAGE and FOWLER, JJ.

Gans & Haman, George Whitelock, and Vernon Cook, for appellants. Thos. M. Lanahan and Frank Gosnell, for appellees.

MCSHERRY C.J.

The contention in this case is between the holders of what is called "preferred stock" and creditors of an insolvent corporation. The stockholders of the Chesapeake Guano Company, a corporation formed under the general corporation laws of this state, voted some years ago to increase the company's capital by the issue of $60,000 of preferred stock. Without pausing at this point to examine whether the method pursued was the proper one or not, it suffices for the present to say that the authorized shares were all taken. Subsequently the company contracted the debts due to unsecured creditors, and thereafter became insolvent and its property and assets were placed in the hands of receivers. The funds now for distribution arose from sources that will be named hereafter. As the discussion requires, and the ultimate decision of the controversy involves, for the first time a judicial interpretation of the statutes under the provisions of which this stock was issued, the enactments, though somewhat lengthy, will be set forth in full. They are contained in section 294, art. 23, of the Code. This section is made up of two acts of assembly, passed at different periods. They are Acts 1868, c. 471, § 219, and Acts 1880, c. 474. In transcribing them below, the terms of the later act will be put in italics, so that they may be easily distinguished, and more especially so that the radical changes they made in the substance of the thing with which the legislature had dealt under the earlier may be more readily perceived. The following are the words of the Code "Every corporation incorporated under the laws of this state, which has the power to issue bonds as evidences of indebtedness, and to secure the same by mortgage of the property of such corporation, or which has the power to obtain such money upon mortgage, may, whenever in the judgment of said corporation it is expedient to do so, in place of issuing such bonds and securing the same by a mortgage of the property of said corporation, or instead of obtaining money upon mortgage, issue a preferred stock for any amount for which said corporation may be authorized to issue its bonds, or for any amount which the said corporation may be authorized to obtain upon mortgage of its property and may dispose of the said stock by sale, on such terms as it may prescribe, or by permitting the same to be subscribed for, as in the judgment of said corporation may be deemed expedient; and every corporation creating such preferred stock as aforesaid, may execute as agreement under seal to be acknowledged as conveyances of land are required to be acknowledged, and recorded in the office of the clerk of the circuit court for the county where the principal office of such corporation shall be situated, or in the office of the clerk of the superior court of Baltimore city, in case such office shall be situated in said city, guaranteeing to the purchasers of, or subscribers to, such preferred stock, a perpetual dividend of six per centum per annum out of the profits of the said corporation, payable yearly or half-yearly, as said corporation shall determine, before any dividend is distributed to any of the stockholders of the said corporation, other than the holders of said preferred stock so created; and the holders thereof shall have all the incidents, rights, privileges and immunities, and liabilities, to which the capital stock of said corporation, or the holders thereof, may be entitled or subject: provided, however, that no corporation shall exercise any power under this section, unless the creation of such preferred stock shall be authorized by a general meeting of the stockholders of such corporation; and the said preferred stock shall be and constitute a lien on the franchises and property of such corporation, and have priority over any subsequently created mortgage, or other incumbrance." The provision requiring an agreement to be executed and to be placed on record was strictly complied with. The certificates were issued, and the amount subscribed was fully paid. Thereafter the debts which it is claimed ought to be paid out of the fund now in court for distribution were contracted. The fund arose in this way: The improvements on the company's property,--that is, the buildings and machinery,--together with the stock in trade, were insured by the corporation against loss by fire. After the receivers had been appointed, these improvements and the stock, or some of it, were burned. The receivers collected the insurance. This constitutes part of the fund. The rest is made up of book accounts and rents collected by the receivers. No part of the property, real or personal, except, perhaps, stock in trade, appears to have been sold. The holders of the preferred stock (or of what is called preferred stock) issued under the above-quoted section of the Code, claim that they are, as holders of those shares, and in virtue of the terms of the statute, preferred creditors, and entitled, in consequence, to be paid back out of these funds the amount paid in by them on their shares; while the persons who became creditors of the company after the recording of the agreement already alluded to insist that they are entitled to be paid the debts due to them before any distribution is made to the stockholders. Thus this feature of the controversy is sharply defined.

If this stock is preferred stock, pure and simple, the contention of the creditors is right. The law is perfectly well settled that, as between creditors and ordinary preferred stockholders, the latter, as owners of the property of an insolvent corporation, are, upon a distribution of its assets, entitled to nothing until its creditors are first fully paid. There is a palpable difference between the relation of a stockholder and a creditor to the corporate property. Stock, whether preferred or common, is capital and, generally speaking, a certificate of stock merely evidences the amount which the holder has contributed to or ventured in the enterprise. Such a certificate, representing nothing more than the extent of his ownership in the capital, cannot well be treated as indicating that he is, by virtue of it alone, also to the same extent a creditor, who may compete with other creditors in the distribution of the fund arising from a conversion of the corporation's assets into money. He cannot, if he is simply an ordinary preferred stockholder, in the nature of things, so far as third persons are concerned, be at one and the same time, and by force of the same certificate, both part owner of the property and creditor of the company for that portion of its capital which stands in his name. His certificate, therefore, in such circumstances, merely measures the quantum of his ownership. As his chance of gain throws on the stockholder, as respects creditors, the entire risk of the loss of his contribution to the capital, it is a fixed characteristic of capital stock that no part of it can be withdrawn for the purpose of repaying the principal of the capital until the debts of the corporation are satisfied. Warren v. King, 108 U.S. 389, 2 S.Ct. 789; Cook, Stock & S. § 271; Hamlin v. Trust Co., 47 U.S. App. 422, 24 C. C. A. 271, and 78 F. 664. Whether this characteristic may be modified by statute will be considered later on. To be strictly accurate, we ought to say, there is a sense in which a shareholder is a creditor. In that sense every corporation includes its capital stock among its liabilities, but it is a liability which is postponed to every other liability. And as to the matured and unpaid guarantied dividends due on preferred stock the relation of creditor undoubtedly exists. Baltimore & O. R. Co. v. State, 36 Md. 541. But, after all, is this particular stock, technically speaking, ordinary preferred stock, and subject, consequently, to the legal incidents and characteristics of that species of property? If you call it preferred stock, and it is what you call it, then the law is perfectly clear that it has no priority over the contesting creditors. If you call it preferred stock, and it is not preferred stock, then, obviously, it is not governed by the principles applicable to preferred stock, but by those relating to the thing that it really is. The mere naming of it does not make it that which it is named, if, in fact, it is something else. Its properties and qualities determine what it is. If the statute calls it what its properties and qualities show that it is not, surely it does not thereby become what it is misnamed, and cease to be what it essentially is. Calling stock preferred stock does not per se define the rights in such stock, but these depend on the statute or contract under which it was issued. Elkins v. Railroad Co., 36 N. J. Eq. 233. As said by the supreme court of Ohio: "To call a thing a wrong name does not change its nature. A mortgage creditor, although denominated a preferred stockholder, is a mortgage creditor nevertheless; and interest is not changed into a dividend by calling it a dividend. Nothing is more common, in the construction of statutes...