Joslin v. Boston & M.R. Co.

• Decision Date: 27 February 1931
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court
• Parties: JOSLIN v. BOSTON & M. R. CO.

274 Mass. 551

175 N.E. 156

JOSLIN

v.BOSTON & M. R. CO.

Supreme Judicial Court of Massachusetts, Suffolk.

Feb. 27, 1931.

Case Reserved from Supreme Judicial Court, Suffolk County.

Suit by Arthur W. Joslin against the Boston & Maine Railroad Company and others, reserved for determination by the Supreme Judicial Court.

Bill dismissed.

J. T. Pugh and R. E. Joslin, both of Boston, for plaintiff.

F. H. Nash, of Boston, for Boston & M. R. Co. and its directors.

Maxwell E. Foster and J. L. Hall, both of Boston, for Boston Railroad Holding Co.

RUGG, C. J.

This suit in equity is brought by the owner of shares of preferred stock in the defendant railroad corporation (hereafter called the railroad) against the railroad, its directors, and the Boston Holding Company, the owner of a large number of shares of the common stock as well as of some shares of preferred stock in the railroad. The objects of the suit are (1) to enjoin the payment by the railroad of any dividend upon its common stock until there shall have been declared and paid to holders of its preferred stock dividends unpaid for 1925, 1926, 1927 and 1828, and (2) to order the amount of a dividend declared upon common stock in February, 1930, to be paid to holders of preferred stock.

The case was reserved for determination upon the bill and answers. Therefore, the facts set out in the bill and not denied in the answers, and all facts well pleaded in the answers at variance with the allegations of the bill, must be taken to be true. Perkins v. Nichols, 11 Allen, 542, 544;Public Service Commissioners v. New England Telephone & Telegraph Co., 232 Mass. 465, 466, 122 N. E. 567, 4 A. L. R. 1662;Polish Political Club v. Cloper, 260 Mass. 559, 560, 157 N. E. 705. One paragraph of the answer of the railroad contains a demurrer.

The relevant facts are these: There are four classes of stock in the railroad termed respectively prior preference, first preferred, preferred, and common. The first two are each expressly entitled in the order named to stated cumulative dividends out of net profits or surplus in preference to stock of junior grades. Dividends on those two classes of stock have been paid and no question arises concerning them. The rights of the stock held by the plaintiff, that is, of the preferred stock, are expressed in these words: ‘The holders of the preferred stock shall be entitled out the net profits or surplus of the corporation as determined from time to time by the Board of Directors according to law, after the payment or setting aside of an amount equal to all accrued and unpaid dividends on the prior preference stock and first preferred stock which may be from time to time outstanding, to semi-annual non-cumulative preferential dividends at the rate of 6% per annum. * * * It is understood that any accumulated surplus, undivided profits or other income available for the payment of dividends upon the first preferred stock shall, after the payment or setting aside of an amount equal to all accrued and unpaid dividends on the prior preference stock and the first preferred stock, be available for the payment of dividends on the preferred stock, and the same shall be so applied without reference to whether any dividends are paid in that year upon the common stock.’ No dividend has been declared upon preferred stock for the years 1925, 1926, 1927 and 1928, but since 1928 such dividends have been declared and duly paid. The amount of the dividends on the entire outstanding preferred stock unpaid for the years in question is $755,952. The directors of the railroad, in February, 1930, declared a dividend of one per cent. equal to $395,051, upon the common stock payable on april 1, 1930. The amount of this dividend, in the opinion of the directors, is surplus available for dividends. Dividendson preferred stock were not paid for the years in question because in none of those years were the net profits or surplus of the railroad sufficient, in the judgment of the directors, to justify the declaration of such dividends; but on the contrary, no part of its earnings could, consistently with its obligations to its stockholders and its duties to the public in the safe and efficient maintenance of its property and service, have been distributed in dividends to holders of preferred stock, and its surplus earnings have been actually appropriated to fixed and permanent improvements and additions to property and equipment to enable it adequately to discharge its public duties. In support of that judgment of the directors there is set out in detail in the answer of the railroad its financial condition in each of those years. During those years amounts appropriated out of income to improvements and additions and charged to operating expenses aggregated approximately $12,000,000, and those charged to surplus were in excess of $800,000. In the view that we take of the case, it is not necessary to analyze the financial condition disclosed by the answer. The railroad by its declaration of a dividend upon the common stock concedes that at least there is the equivalent of the sum so declared in its net profits and surplus, not necessary, in the judgment of the directors, for the care, maintenance and operation of its property and business. On this record it may be assumed that there has been in each of the years in question an amount of net earnings sufficient to pay dividends on the preferred stock appropriated by the directors to the general improvement of the property of the railroad, or to the right adjustment of its accounts as to depreciation in the value of some of its assets.

The issue between the parties is thus sharply drawn. The plaintiff contends that, since there is now income available according to the determination of the directors for dividends upon the common stock, such net income must be devoted exclusively to the payment of dividends upon the preferred stock for the years in question when no dividends have been paid on that stock, and that no dividends can lawfully be paid on the common stock until all such unpaid dividends on the preferred stock have been paid in full.

The relationship of the parties for the purposes of the present case is contractual. The decision depends upon the correct construction of the language of the paragraph creating the preferred stock viewed as a contract. Thomas v. Laconia Car Co., 251 Mass. 529, 533, 146 N. E. 775;Page v. Whittenton Manuf. Co., 211 Mass. 424, 427, 97 N. E. 1006. That language must be interpreted in the light of general principles governing the management of all corporations. Accumulated profits of surplus gives to stockholders no right to distribution of income in the form of dividends until the directors in their sound discretion vote to declare a...