Leviness v. Consolidated Gas, Elec. Light & Power Co. of Baltimore
| Decision Date | 13 January 1911 |
| Citation | 80 A. 304,114 Md. 559 |
| Parties | LEVINESS et al. v. CONSOLIDATED GAS, ELECTRIC LIGHT & POWER CO. OF BALTIMORE et al. |
| Court | Maryland Court of Appeals |
Appeal from Circuit Court No. 2 of Baltimore City; Henry Stockbridge, Judge.
Suit by the Consolidated Gas, Electric Light & Power Company of Baltimore and others against Charles T. Leviness, Jr., and others. From a judgment for complainants, defendants appeal. Decree reversed as to costs and affirmed in all other respects.
Argued before BOYD, C.J., and PEARCE, SCHMUCKER, PATTISON, and URNER, JJ.
Edward M. Hammond and Joseph C. France, for appellants.
W Calvin Chestnut, for appellees.
In this case the inquiry is whether property, belonging to a corporation and subject to a statutory preferred stock lien can be released from that incumbrance for the purposes of sale and reinvestment, and, if so, what is the proper procedure to accomplish such a result.
The suit was brought by the appellee, the Consolidated Gas Electric Light & Power Company of Baltimore, for the specific performance of a contract for the sale to the appellants for $50,000 of an unimproved lot of ground upon which the principal office of the company was formerly located. This lot, with the other corporate property, was subject to the prior lien of a mortgage securing a large issue of bonds and also to the lien of the preferred stock of the company created under section 408 of article 23 of the Code of Public General Laws. The mortgage contains a clause enabling the company, with the consent of the trustee for the bondholders, to sell any part of the mortgaged property clear of the mortgage lien, the purchase money, however, to be paid to the trustee, and to be held or reinvested as particularly provided. Such consent has been duly obtained for the sale in question. There is no provision for the release of the lien of the preferred stock either in the statute authorizing, or the instrument directing, its issue. The appellants, as purchasers of the lot mentioned, while desirous to consummate the transaction, object to the title on the ground that it may not be susceptible of conveyance to them discharged of the lien of the preferred stock.
The vendor company was formed by the consolidation of two previously existing corporations. In the certificate of consolidation provision was made for the issuance of preferred stock in two classes, the first, amounting to $700,000, to be known as "prior lien preferred stock," and the second, amounting to $11,616,774, to be known as "preferred stock." To the preferred stock of each class a perpetual annual dividend of 6 per centum was guaranteed "out of the profits of the company." It was provided that the holders of preferred stock, of both classes, should have "all the incidents, rights, privileges, immunities and liabilities to which the capital stock of said corporation, or the holders thereof, may be entitled or subject," and that this stock "shall be and constitute a lien on the franchises and property of said corporation, and shall have priority over any subsequently created mortgage or other incumbrance"; but it was made "subject and subordinate" to any mortgages or other liens already existing upon the properties of the consolidating companies. The prior lien preferred stock was given priority as to dividends and liens over the other class of preferred stock. Provision was made for the redemption of the stock at any dividend period, after notice, at $105 per share for the prior lien preferred, and $120 per share for the preferred, the par value being $100. There are at present outstanding issues of the capital stock of the company, as follows: Prior lien preferred, $700,000; preferred, $6,360,054; and common, $6,300,034.
Section 408 of article 23 of the Code, which was in force at the time of the issuance of the preferred stock, provided that any Maryland corporation having the power to issue bonds and to secure them by mortgage, or to obtain money on mortgage, might, in lieu of those methods, and in like amount, issue preferred stock and dispose of it by sale or subscription; that an agreement under seal might be executed by the corporation, to be acknowledged and recorded in the same manner as conveyances of land, guaranteeing a perpetual dividend of 6 per centum per annum on such preferred stock, out of the corporate profits, before any dividend should be distributed to the other stockholders; that the holders of the preferred stock should have all the incidents, rights, privileges and immunities and liabilities to which the capital stock of the corporation, or the holders thereof, might be entitled or subject; provided that no corporation should exercise any power under the section unless so authorized by a general meeting of the stockholders; and that the preferred stock should "be and constitute a lien on the franchises and property of such corporation, and have priority over any subsequently created mortgage or other incumbrance." This legislation was repealed by chapter 240 of the Acts of 1908. As originally enacted by chapter 471 of the Acts of 1868 it provided for the issuance of preferred stock, but did not make it a lien. This latter feature was incorporated by chapter 474 of the Acts of 1880. While no such difficulty as the one here involved can arise as to any issue of stock since the repeal of the statute, it is apparent that the question before us is one of great importance to interests which originated under the law during the 28 years it was in effect.
It appears without dispute from the evidence in the record that a sale of the lot here in question would be advantageous to the company and its stockholders, and is really necessary to be made in order that the capital invested in the property may become productive. After the removal of the company's office to a more suitable location in 1903 the building upon this lot was vacant until it was destroyed in the conflagration of 1904. Since that time the lot has been for sale as it is not available for any of the company's purposes. The offer accepted from the appellants is shown to be fair and adequate. If the sale cannot be consummated because of the lien of the preferred stock, the company must be indefinitely incumbered with an investment which is not only unprofitable but expensive; and for the same reason other unproductive properties shown by the record to be owned by the company, representing an original aggregate cost of about $200,000, and retained at a constant loss, must be held by it perpetually, or until the entire issue of upwards of $7,000,000 of preferred stock can be redeemed. It would be an anomalous situation if a lien provided for the protection of stockholders should prove such a serious embarrassment to the corporate body of which they are members, and upon whose profitable operation they are dependent for the income value of their stock.
The holders of the two classes of preferred stock number more than 800. Many of them are nonresidents of Maryland and some reside in foreign countries. It was shown that it would be so difficult and expensive, and would cause so much delay, to bring them all into a proceeding or agreement for the discharge of the lien of the stock, as to make that course entirely impracticable.
If the lien of the preferred stock were represented by a trustee duly appointed for the protection and enforcement of the rights of the stockholder lienors, or if the stock were held by a sufficiently limited number of persons to admit of their being made parties to a suit in equity, there could be no doubt, since the decision in Baltimore City v. United Rys. Co., 108 Md. 71, 69 A. 436, 16 L. R. A. (N. S.) 1006, that upon a proper showing as to the advantage or necessity of a proposed sale of part of the corporate property, in a proceeding to which the stockholders, or their trustee, were summoned, a decree could be obtained for the release of the property from the lien, and for the appropriation of the proceeds in such manner as to subserve the interests of those for whose benefit the security was created.
In the case cited the question was whether a lot of ground owned by the United Railways Company could be conveyed free from the lien of its income mortgage. The sale of the lot was beneficial to the company and its bondholders. There was no releasing clause in the income mortgage although there was such a clause in a prior mortgage of the company's property. A bill had been filed by the company against the Maryland Trust Company, the trustee under the income mortgage, for the purpose of having it authorized and directed to release the mortgage, as to the lot sold, upon condition that the purchase money be subject to the trust of the mortgage and be applied, under the authority of the court, to the purchase of other property which would be subject to the jurisdiction of the court and to the lien of the income mortgage, or to the purchase of bonds which were liens on the property prior to that mortgage. The court was also asked to retain jurisdiction of the case and thereafter authorize the trustee to execute releases of the lien of the mortgage on such property as the company might sell under the authority of the court, when no longer needed for its railroad purposes or when its sale would be to the advantage of all parties interested. Subsequently another bill was filed by the trustee under the first mortgage, a holder of one of the first mortgage bonds and a holder of income bonds against the railway company, the trustee under the income mortgage and a number of holders of income bonds, praying that the trustee under that mortgage be required to release the mortgaged property whenever ordered by the court upon the petition of the...
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