Nat'l Newark & Essex Banking Co. of Newark v. Durant Motor Co. of N.J.

• Decision Date: 08 September 1938
• Citation: 1 A.2d 316,124 N.J.Eq. 213
• Parties: NATIONAL NEWARK & ESSEX BANKING CO. OF NEWARK et al. v. DURANT MOTOR CO. OF NEW JERSEY et al.
• Court: New Jersey Court of Chancery

1 A.2d 316

124 N.J.Eq. 213

NATIONAL NEWARK & ESSEX BANKING CO. OF NEWARK et al.

v. DURANT MOTOR CO. OF NEW JERSEY et al.

Court of Chancery of New Jersey.

Sept. 8, 1938.

Syllabus by the Court.

1. Successful bid at foreclosure sale contained an agreement that preferred stock in a corporation to be formed to take title to the property would be issued in exchange for bonds which had been secured by the foreclosed mortgage. Held, the corporation, as assignee of the bidder, may, by petition entitled in the foreclosure suit, obtain the instruction of the court in fulfilling the terms of the bid-contract.

2. The bid-contract stated the gist of certain important terms of the preferred stock. The corporation presents to the court a form of stock certificate setting forth with precision the rights of the preferred stockholders, but not copying even approximately the words of the contract. Held, that the certificate should be approved if it secures to preferred stockholders the rights which the bid-contract promised to them.

3. In the absence of agreement to the contrary, whatever is gross income or net profits for the purpose of a common dividend must be considered gross income or net profits for a preferred dividend.

4. Profit from sale of a capital asset, or from the purchase and resale of shares of the company's own stock, or from the settlement at a discount of a debt which was incurred as an operating expense—enters into earnings or surplus account and is a proper source of dividends.

5. Under the circumstances of this case, no profit or surplus is considered to result from the compromise of any lien which encumbered the company's property at the time it was acquired, or of any obligation incurred for capital purposes, or from the retirement at less than par of any preferred 'stock or bonds which were exchangeable for such stock.

6. Insurance premiums and depreciations are proper deductions from gross income, for the purpose of determining whether dividends are earned.

7. Non-cumulative preferred dividends are not earned as long as there remains a deficit from losses sustained in prior years.

Foreclosure suit by the National Newark & Essex Banking Company of Newark, trustee, etc., against the Durant Motor Company of New Jersey and others, wherein a sale was made to the Waverly Terminal Company's assignor. On petition by the Waverly Terminal Company for approval of a suggested form of preferred stock certificates and to have method of issuance and delivery of preferred stock to old bondholders fixed.

Decree in accordance with opinion.

Child, Riker, March & Shipman, of Newark, for petitioner.

Joseph A. Fuerstman, of Newark, for respondent.

Coult, Satz & Tomlinson, of Newark, for defendant DuBose.

BIGELOW, Vice Chancellor.

This suit to foreclose a mortgage securing bonds in the par amount of $770,000, duly proceeded to decree and sale. But no substantial bids were made, although the sale was several times adjourned. Finally, however, the master received a bid in a nominal sum, but containing an agreement that the bidder would cause a corporation to be formed to take title to the property, and that the corporation would secure by mortgage the fees and expenses of the trustee-complainant, its counsel and the receiver who had been appointed in the cause, and also that the corporation would issue "to the bondholders under the trust mortgage preferred stock limited in amount and having an aggregate par value of $770,000, each bondholder to receive in stock an equivalent par amount to the principal of his bonds, which said stock is to have no voting power and is to be entitled to non-cumulative dividends at 6%, to be paid only to such extent as it shall be earned in any fiscal year, and which said stock upon the dissolution of the corporation, or the sale of the corporate assets, is to be paid in full prior to any payments being made to any other classes of stock and which said stock is to be redeemable at the option of the corporation at any time upon the payment of the par value thereof, plus proportionate dividends, if any. Provision is to be made for meeting of the preferred stockholders, and if two-thirds of those present and voting at such meeting shall vote to reduce the amount at which it may be redeemed, the redemption price of all the preferred stock shall be reduced accordingly. Unless two-thirds of the preferred stockholders voting at any such meeting shall so approve, no other class of stock is to be issued with any rights prior to those provided for hereinabove, over such preferred stock."

The bid, including the agreement, was approved and accepted by order of November 27, 1933. A new corporation, Waverly Terminal Company, was organized, accepted an assignment of the bid and received from the master conveyance of the property. The mortgages were executed as agreed and have been paid off. Now the Terminal Company petitions the court to approve a suggested form of preferred stock certificate and to fix the method of the issuance and delivery of the preferred stock to the old bondholders. Holders of $10,000 par value of the bonds make sundry objections.

The first objection is that the Terminal Company should have proceeded by bill instead of by petition and order to show cause in the foreclosure suit.

A successful bidder at foreclosure sale, or his assignee, makes himself a party to the foreclosure cause. Other parties may proceed against him by petition in the cause to compel specific performance of his contract; or to set aside the sale; or the bidder may petition for relief, such as cancellation of his bid. Morrisse v. Inglis, 46 N.J.Eq. 306, 19 A. 16; Boorum v. Tucker, 51 N.J.Eq. 135, 26 A. 456; Cropper v. Brown, 76 N.J.Eq. 406, 74 A. 987, 139 Am. St.Rep. 770; Murphy v. Skelly, 101 N.J.Eq. 793, 138 A. 882; Fuchs v. Syndicate Realty Co., 107 N.J.Eq. 506, 153 A. 584. A sheriff's sale may be set aside on petition and without bill, after the sale has been carried into effect by the delivery of a deed, and even after the purchaser has reconveyed to a third party. Hinners v. Banville, 114 N.J. Eq. 348, 168 A. 618.

By the petition now before me, the Terminal Company, as assignee of the bid, seeks the aid and instructions of the court in fulfilling the terms of the bid. The procedure adopted is proper.

Objectors next say that the court's guidance in drafting the stock certificates is unnecessary and should be denied since petitioner's duty is merely to copy into the stock certificates the language of the bid quoted above; that any additions, omissions, or alterations would constitute in greater or less degree a departure from the terms of the contract between the parties. Whether this is so depends on the intention disclosed by the agreement. Inspection of the agreement convinces me that it was never intended to copy the words of the agreement verbatim—or even approximately—into the stock certificate. Note, especially, the clause, "Provision is to be made for meetings of the preferred stockholders." Clearly it was not contemplated that the clause be inserted in the stock certificate, but rather that the petitioner and its counsel should devise...